Why Buy A10 Networks Stock?

Although operating in a lucrative market, A10 Networks (ATEN) is seeing a pullback in its top line due to lower client capital expenditures. For investors, the question is whether that’s an opportunity to buy or a time to sell?

As digitization is becoming the norm in a highly connected working environment, safety is becoming of utmost importance. Cyberthreats are on the rise as increasing amounts of data are being targeted. Anything as simple as a Distributed denial-of-service (DDoS) attack can create a significant impact.

Furthermore, experts are concerned that hackers using AI could make an even bigger impact equivalent to a “cyber-physical attack.”

The cybersecurity industry has thrived amid this backdrop. But how has A10 Networks, Inc. (NYSE:ATEN), a security and infrastructure solutions provider, capitalized on the lucrative opportunities? 

While shares of A10 Networks significantly outperformed the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which represents the broader market, over the past month, their performance over the past couple of years has been underwhelming.

Can A10 Networks overcome the challenges it is facing, and is the stock a bargain at the current price level? 

Subdued Demand Is Affecting A10 Networks

The American business environment is cold amid macroeconomic challenges. North American service providers have cut their capital expenditures, which has impacted A10 Networks’ top line performance. Although the company is increasing its focus on enterprises, as of the last quarter, it relied on service providers for 58% of its revenues.

Lower capex and long sales cycles from service providers reduced the company’s product revenue by 18.2% to $40.6 million in the fourth quarter of fiscal 2023 compared to the year-ago period. This, in turn, led to total revenue decreasing by 9.3% year-over-year to $70.4 million.

A10 Networks also shows considerable reliance on the American economy, which should explain its macroeconomic impact on its financials. In the fourth quarter, 57% of its revenues came from the Americas, compared to 26% and 16% from the APJ and EMEA regions, respectively.

Furthermore, the U.S. economy is pivotal in its operations. In the fiscal year 2023, 53% of its top line accrued to the Americas, of which 45% came from the U.S. alone and only 8% from the rest of America.

Looking at its annual performance, 2023 was the only year A10 Networks’ yearly growth trajectory was disrupted in four years. Revenue was $225.5 million in fiscal 2020; it increased in fiscal 2021 and 2022 to $250 million and $280.3 million, respectively before declining by 10% from 2022 to $251.7 million in fiscal 2023.

Increasing Margins of A10 Networks

In absolute terms, A10 Networks’ profitability has declined. For fiscal 2023, non-GAAP gross profit and operating income fell from their year-ago levels, mirroring the revenue pullback.

However, as a testament to the company’s increasing operational efficacy, margins have seen sustained growth over four years without any disruptions in between.

The non-GAAP gross margin was 78.6% in 2020, 79.6% in 2021, 80.3% in 2022, and 81.7% in 2023.

Following a similar trend, the non-GAAP operating margin was 15.6% in 2020, 21.6% in 2021, 23.9% in 2022, and 24.6% in 2023.

Is A10 Networks’ Dividend Safe?

A10 Networks has a short history of dividend payments. Due to a strong balance sheet, the company initiated dividend payments in October 2021, announcing a quarterly payment of $0.05 per share. Since then, it has taken a disciplined approach to capital returns and has paid regular quarterly dividends.

In November 2022, the initial dividend was raised by 20% to $0.06 per share quarterly, the same rate the company paid this month. In 2023, A10 Networks returned $17.8 million of cash to shareholders through dividends.

Its annual dividend of $0.24 yields 1.64% on current prices. It has a 44.58% payout ratio, which implies that the company is significantly reinvesting in its business instead of aggressively paying out its earnings to shareholders.

However, considering the company’s limited dividend-paying history, low cash flows from operations in 2023 and current business troubles, dividend payments cannot be termed sustainable.  

CEO Selling A10 Networks Shares

A10 Networks’ CEO Dhrupad Trivedi has sold the company’s stock multiple times this year while acquiring shares only once.

In January, he sold the shares twice, 8,809 shares on January 24 and 21,498 shares on January 29, for a total value of approximately $415 thousand. In February, he sold 37,636 shares for a total valuation of about $495,000.

Moreover, this month, under a previously set trading plan following rule Rule 10b5-1(c), Mr. Trivedi sold 60,606 shares for about $804,000.

While insider selling is not always adverse or impactful, it undoubtedly raises some concerns regarding management’s outlook on the company.

Why Buy A10 Networks?

A10 Networks is a buy according to Wall Street analysts, who expect a 9.1% hike in share price to the consensus target of $16 per share. Of the three analysts recommending the stock, two suggested buying it, and one advised holding it.

Earnings per share are forecast to rise by 5.3% in 2024. Its forward non-GAAP PEG ratio is 0.95, which is relatively cheap by industry standards.

A10 Networks is operating in a challenging macroeconomic environment, which has affected its top line. However, its margin growth and stable dividend demonstrate operational efficiency.

Although industry tailwinds might propel the stock’s performance in the near future, insider selling raises some concerns. Hence, investors might take a cautious stance on the stock and wait for further developments.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.