This year, shares of cybersecurity outfit Symantec (SYMC) are up almost 19%. Is this stock safe to go higher?
Symantec has spent years in the investor doghouse. The company bought data storage company Veritas for $13 billion in 2005 and ended up with a turkey. The deal drained management's time from cybersecurity and the shares languished in the backwater of many investors' subconscious.
As the company sputtered about, three CEOs had left the company by 2012. Revenue has dropped every year since 2012, as the personal computer business circled the bowl.
The need for prepackaged security software began to dry up. Symantec's flagship product, Norton Antivirus, lost market share as Microsoft (MSFT) incorporated antivirus software into Windows. Cyber threats became more sophisticated and Norton fell further behind.
Meanwhile, the market for enterprise and network security took off. According to Gartner Research, $92 billion will be spent on cybersecurity this year. Earlier this year, Symantec sold Veritas to the Carlyle Group for $4.74 billon and purchased Blue Coat Systems for $4.65 billion. The company appointed former Blue Coat CEO Greg Clark to lead the merged group.
Blue Coat offers advanced network and cloud protection, something that Symantec's pre-packaged antivirus software never did. Its software is used by over 70% of the Fortune Global 500 companies. Blue Coat claims more than 15,000 customers use its products. The company's on-premises secure gateway product sits between users and the internet, and identifies malicious payloads. In addition, Blue Coat's software is used to protect data stored in the cloud -- as well as that of email and mobile users.
Blue Coat increases the mix of total enterprise revenue to 62% and the consumer mix declines to 38%. The merger will be immediately accretive. Blue Coat drops $755 million in revenue right to the top line. The company also announced a $550 million cost-cutting campaign in order to drive earnings growth.
Judging from the jump in the stock, investors are very excited by the deal. But I'm not convinced. Before this deal, Blue Coat was a single-digit (4% to 6%) grower. Almost three-quarters of its business is web gateway security, which isn't very sexy.
The company estimates it will earn $1.70 to $1.80 a share in fiscal 2018, which includes one-time job cuts and elimination of overlap.
I think the stock has gone as far as it can for now. Analysts think the company can deliver 10% to 12% revenue growth, but I'll believe it when I see it. Until this new management team can deliver higher than single-digit top-line growth, I'll hold off on recommending the stock. In my opinion, I don't think Symantec is a safe bet.