Jeffrey C. Smith manages Starboard Value, a hedge fund with a portfolio valued at over $5 billion. And he has invested $405.3 million, 7.8% of the fund, in a stock that very few investors know about.
Gen Digital (NASDAQ:GEN) may not trigger instant name recognition, but Norton, Lifelock, or Avast might ring a bell. The cybersecurity company started out as Symantec, another familiar name, before merging with NortonLifelock in 2019. The company changed names again in 2022 after a merger with Avast, a move that changed the ticker symbol from NLOK to GEN.
GEN shares are up almost 40% over the last 52 weeks, even if the stock has cooled down over 2023. That’s an amazing investment compared to the S&P 500, and even more surprising considering the hard time that tech stocks have had.
In the fourth quarter of 2022, Gen Digital delivered its 14th consecutive quarter with subscriber growth. But it’s not all sunshine for the company. Its massive debt, slow growth, and competitive market are red flags for some investors, even if they are not enough to deter Mr. Smith.
So should you follow his example and invest in GEN too?
Gen Digital: The Leader In Cybersecurity?
Gen Digital is a cyber safety company that consists of the Norton, Avast, LifeLock, Avira, AVG, Reputation Defender, and CCleaner brands. This collection of brands is focused on protecting end-consumers and smaller businesses from the mounting dangers in the digital world.
The company’s rebrand to Gen Digital came after the $8 billion purchase of Czech-based Avast. The new name, often shortened to just Gen in the company’s advertising, was chosen to take the focus off simply antivirus and software security. Gen’s goal is to provide digital freedom in an ever-changing online world.
Cybersecurity demand was already on the rise before the pandemic, but the global health-related lockdowns of 2020-21 sparked the industry’s accelerated growth. Cyber attacks are increasing, and Gen Digital is well-positioned to take advantage of a market that is valued at over $200 billion.
The opportunity is there, and that’s why the company has been able to achieve consistent subscriber growth. Gen Digital’s stability has allowed it to deliver a $0.13 dividend, for a 2.90% annual yield.
GEN Q4 Earnings Report: The Ups and Downs
The company’s GAAP revenue in the fourth quarter of 2022 was $936 million, representing a 33% year-over-year (YOY) increase from 2021. Bookings were up 29% YOY as well, representing over $960 million.
Gen Digital’s diluted earnings per share increased by 2%, and the company has a healthy operating cash flow of over $300 million. Operating margin was also up, with a 3% increase YOY to 56%.
While the positive growth and healthy cash flows are great signs, Gen Digital still has a whole lot of debt. Liabilities exceeding $10 billion are especially alarming considering the company’s market capitalization is about the same: $10.92 billion.
Gen Digital may appear overvalued with a P/E ratio of 18.91, but a price-to-sales value of 3.52 brings things more into perspective. Despite the heavy burden of debt, Q4 was mostly positive for the company.
Competitive Landscape
The cybersecurity industry is booming, but there are also plenty of competitors looking for their share of the market.
McAfee is a well-known competitor for Gen Digital’s flagship Norton Antivirus software. Both services offer subscription-based plans designed to lock in customers long-term.
While Norton has a better price point, McAfee has a user interface that is generally regarded as easier to navigate. The positive for Norton is the ability to sync with the company’s other products like LifeLock.
Aside from McAfee, there are a host of other options for consumers to choose from. Bitdefender, TrendMicro, ESET, Malwarebytes, and more are all competing with the company’s brands.
While Gen Digital’s brands may have better name recognition, other companies can compete on price and quality. And many of Gen’s rivals are growing at a faster rate.
Another substantive concern for GEN investors is the increasing emphasis that tech giants are placing on their own security solutions. Microsoft Defender has been enhanced and, more importantly, it’s included in the Office bundle that so many consumers have already purchased. Google and Apple are doing likewise, and their footprint is much larger than Gen Digital’s.
Future Outlook
Gen Digital is a cyber safety company that includes some of the biggest cybersecurity software brands in the industry. The company’s goal is to give its users true digital freedom. Consistent subscriber growth and healthy revenue are major positives in a tough economy.
Going forward, the company expects revenues of $935 to $945 million for the first quarter of 2023, which would be roughly the same as last quarter. There’s similar guidance for EPS, with a forecast of $0.44 to $0.46 compared to $0.45 in the 4th quarter of 2022. The company just might make it 15 straight quarters with consecutive growth, albeit modest.
In the short term, it’s likely that the stock will stay the same or continue the slightly downward trend it’s been on over the past month and year to date. Given the slow revenue growth, short-term investors aren’t likely to get fired up about the company.
But long-term investors should take a long look at the stock given the current discounted price. The stock is trading at around $17 and, using a 5-year discounted cash flow forecast analysis, the estimated fair value sits at $26.
Despite heavy debt and a highly competitive landscape, the company has achieved strong growth in a booming industry. It’s apparent why a billionaire like Jeffrey C. Smith would place such a huge bet on the company: it’s a bet that’s likely to pay off in the long run.
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