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CyberArk: Changing Model May Mean Temporary Headwinds

CyberArk Software (CYBR) develops, markets, and sells cybersecurity solutions around the world.

It operates in the United States, Europe, the Middle East, and Asia. CyberArk’s major focus is on access management and identity security solutions.

I am neutral on CYBR stock. (See Analysts’ Top Stocks on TipRanks)

Macro Conditions Are Favorable

The cybersecurity industry is in a major phase of growth. Malware, data breaches, and ransomware are constant concerns. Schools, hospitals, pension plans, mom and pop businesses, and large corporations alike are targets.

Global damages are in the hundred of billions each year, and climbing. As with most things, prevention is favorable to correction. This is the backdrop in which CyberArk conducts its identity security business.

CyberArk claims over 7,000 customers, including more than 50% of the Fortune 500. The company has $315 million in recurring revenue, and is growing its subscription business fast. In late 2020 CyberArk began moving from a licensing model to a subscription model. Unfortunately, this change may have come too late.

Competition in the cybersecurity industry has grown tremendously. Cloud-based SaaS enterprises like CrowdStrike (CRWD), Zscaler (ZS), and Okta (OKTA) have taken the industry by storm. Newcomers SentinelOne (S) and IronNet (IRNT) also have massive potential. These businesses began as SaaS models, and have a head start on CyberArk’s new subscription model.

While the subscription revenue has grown well, it only accounted for 65% of total revenues in Q2 2021. Total revenues are only expected to grow 5.9% next year. This is far lower than competitors, who are growing revenues (in some cases) over 50% year-over-year.

Valuation May Suffer

The lack of growth may cause the valuation to suffer moving forward.

CyberArk currently trades near all-time highs. The price-to-sales (PS) ratio is 13.9x. This is not out of range for a growing SaaS company.

The issue is the tepid total revenue growth expected next year. The lack of growth presents a PEG ratio much higher than 1. A PEG ratio greater than 1 is generally considered unfavorable.

To this end, the company also does not pass the SaaS Rule of 40 test. This is dangerous territory, as competition continues to add customers and recurring revenues at a breakneck pace. Management will need to execute impeccably well to remain a major player in the sector.

Wall Street’s Take

Wall Street analysts are very bullish on CYBR stock, with a Strong Buy consensus rating, based on 10 Buy and two Hold recommendations.

The average CyberArk price target of $180.91 implies 7.3% upside potential.

Summary on CyberArk

CyberArk has correctly moved from a licensing model to a subscription model.

To this end, annual recurring revenues are increasing admirably. The issue is that the move may have come too late.

At the very least, there will be short-to-medium-term headwinds. The macro conditions for cybersecurity are very favorable. This has caused a number of serious competitors to IPO in recent years. These entrants began with subscription models, and are making hay, while CyberArk transitions.

Investors should be cautious during this period as the stock trades near all-time highs.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.

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