Darspal S Mann
Long/short equity, growth at reasonable price, special situations, deep value

Proofpoint: Fundamentals Suggest Still More Downside

Proofpoint Inc. (NASDAQ:PFPT), a hot cloud-based network security play, is trading at a gravity-defying valuation on the back of strong adoption of the company's TAP (Targeted Attack Protection) solution, gaining share from legacy solutions and upselling in its existing customer base. Recently, the stock has corrected with the broader equity markets, but fundamentals suggest more downside from here.

Strategically, the easy early adoption growth curve is over; now growth may depend more on cross selling of archival and encryption products, expansion of distribution channel and new product offerings. These plans seem to be hitting the wall with aggressive competitors, limited pricing power and a weakened balance sheet.

Operationally, leading indicators point to business momentum that is petering out,...

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