McAfee (MCFE) is a device-to-cloud cybersecurity company, engaging in protecting consumers, enterprises, and governments from cyberattacks with integrated security, privacy, and trust solutions.
The company’s Personal Protection Service provides holistic digital protection for an individual or family. Its platform includes device security, privacy, safe Wi-Fi, online protection, and identity protection, creating a seamless and integrated digital moat.
For enterprises and governments, it offers a comprehensive cybersecurity solution that protects its customers against adversarial threats. It operates in two business segments, namely Consumer and Enterprise. McAfee was incorporated in 2019 and is headquartered in San Jose, California.
I am neutral on MCFE stock based on important news about going private soon. If it continues to be a publicly traded company my thesis would be bearish. The company has weak financial health, a lot of debt, and negative shareholder equity.
McAfee Business News
McAfee’s consumer business grew 24% year-over-year in Q3 2021.
“McAfee delivered another strong quarter, with revenue growing 24% year-over-year,” said Peter Leav, McAfee president and Chief Executive Officer. “Our continued commitment to secure our customers’ online footprint helped us add 640 thousand net new directto-consumer subscribers, a year-over-year increase of 16% in Q3. We continue to invest in our online protection services and diversified go-to-market channel, as consumers increasingly adopt digital services.”
The biggest news investors should know now is that the company will go private in 2022. On November 8, 2021, McAfee announced that it will be acquired by an investment group for more than $14 billion.
The transaction details are that “the Investor Group will acquire all outstanding shares of McAfee common stock for $26.00 per share in an all-cash transaction valued at approximately $12 billion on an equity value basis, and over $14 billion on an enterprise value basis after giving effect to repayment of McAfee debt.”
What is of paramount importance is the fact that McAfee shareholders will get $26 in cash for each share of common stock they own. This means that MCFE stock should exhibit little to almost zero volatility, as its current stock price is $25.76.
Q3 2021 Financial Results
In Q3 2021 GAAP EPS of $4.36 was a beat by $4.23, and revenue of $491 million was a beat by $25.04 million. MCFE stock earnings in the past five quarters are mixed, beating estimates only two times.
The firm reported a gross profit of $373 million and an operating income of $143 million, compared to a gross profit of $283 million, and an operating income of $82 million in Q3 2020.
I argue that there was a significant premium paid to acquire McAfee, which of course is good news for its shareholders.
McAfee has an EV/sales (TTM) ratio of 7.03 and an EV/EBIT (TTM) ratio of 29.37. The Information Technology sector median values for EV/Sales (TTM) and EV/EBIT (TTM) ratios are 4.32 and 25.9, respectively.
Fundamentals – Risks
Two major risks make MCFE stock unattractive. The company has weak financial strength, evidenced by long-term debt of $2,889 million as per the latest quarter, and a total equity deficit of $7,601 million.
The stock has an Altman Z-score of 1.05 suggesting bankruptcy as a possibility in the next two years. Additionally, shareholders have been diluted in the past year, with total shares outstanding growing by 3.8%.
Wall Street’s Take
McAfee has a Hold consensus based on four Hold ratings. The average McAfee price target of $25.75 represents 0.04% downside potential.
McAfee Corp. is about to go private in 2022. The stock price is shy of its suggested cash price per share investors will receive. Little to no volatility should be expected until the materialization of the deal.
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