Seeking Alpha

Proofpoint: Still Not A Bargain

About: Proofpoint, Inc. (PFPT)
by: Kayode Omotosho
Kayode Omotosho
Deep Value, Growth

Proofpoint reported in-line numbers going by its current valuation.

Proofpoint's competitive positioning remains strong.

The current valuation doesn't offer an attractive bargain for new investors.

I have a HOLD rating with a PT of $112.

Proofpoint's (NASDAQ:PFPT) growth story remains intact. This will be driven by its improved sales strategies and M&A activities fueled by its recent debt issuance. The current valuation offers a balanced risk/reward on an unattractive balance sheet. I will be unwilling to accumulate more shares at this point. I have a price target of $112 with a hold rating.

Source: New Scientist

Demand (Rating: Bullish)

Demand remains strong, as highlighted by growth in bookings and deferring revenue in the last earnings call. Emails remain one of the strongest attack vectors.

Management pegged Proofpoint's total addressable market at $13 billion. That's a mixture of email, cloud, archiving, threat intelligence, and security awareness solutions.

Overall, demand for Proofpoint's products and services appears strong, and it is safe to also attribute this to the huge spend on SG&A.

Business/Financials (Rating: Neutral)

Source: Author (Data from Seeking Alpha)

Proofpoint's growth continues to be driven by the advanced threat segment, which was responsible for 72% of revenue while growing at 19%. This was driven by both local and international growth, with international revenue coming in strong at 28%.

Management recorded strong wins across its solution bundles, which are offered at 10% to 15% discount to customers. Proofpoint also unlocked a new growth catalyst in FedRAMP. According to the latest CC:

so getting FedRAMP obviously as you noted super- important and super-exciting to us and it became the catalyst for that large deal that we won in the quarter

Going forward, Proofpoint's positioning will improve largely due to its added strengths in the Fed space, followed by its international expansion strategy. Other growth initiatives include the solution bundling strategy to drive its average deal size. Management gave impressive feedback about its bundling initiatives during the last earnings call. Throw in the debt issuance of $920 million for M&A activities, and we have a stock that will continue to be driven by its growth narrative.

Management is trying to delay the switch in narrative from growth to profitability. When you examine the strategies that were laid out in the last earnings, it's clear that the company has all the right tools in its arsenal to lengthen its growth phase.

Source: Author (Using data from Seeking Alpha, data in millions of USD)

Cash flow from operations continues to be driven by stock-based compensation, as depicted in the graph above.

Source: Author (Using data from Seeking Alpha, data in millions of USD)

Cash flow from investing activities reflects Proofpoint's active M&A activities.

Source: Author (Using data from Seeking Alpha, data in millions of USD)

Cash flow from financing activities highlights the recent debt issuance for more M&A activities. And that's why goodwill and other intangibles stand at 30% of total assets - not the most attractive balance sheet you'll desire as a value investor.

At a debt to equity ratio of 134%, investors should take note of the trajectory of Proofpoint's financial leverage.

Valuation (Rating: Neutral)

Due to Proofpoint's lack of profitability, I assume most investors are going to value the stock using growth metrics. Given that the management is well-positioned to execute on the strong growth guidance, and given strong demand in the email and cloud space, Proofpoint will enjoy improved sentiments. At its current P/S of 8, Proofpoint appears undervalued to most oversubscribed SaaS plays. Though, when you compare it to more established cyber plays, a different narrative is painted. Again, if you are wondering why some SaaS stocks can have a P/S ratio of 25x, the chart below provides some explanation. Though, it doesn't erase the fact that they are overvalued, given that they are mostly unprofitable.

Lastly, analysts are bullish on Proofpoint. The Street has an average price target of $141. Analysts have an average 2019 revenue estimate of $883 million. This is at the midpoint of management's guidance of $882.3 million to $884.3 million.

Macro/Competitors (Rating: Bullish)

So throughout Q3, we did not any change in macro buying conditions. So we didn't see projects pushing out. We didn't see elongating sales cycles, and that's true really globally.

Management is upbeat about the macro condition. The demand for cybersecurity stocks remains strong. Proofpoint has a good grasp of its email security niche. It's also performing well in archiving and cloud security.

Conclusion (Overall Rating: Hold, PT: $112)

While the numbers mean the same thing to all investors, the volatility and returns have a personalized meaning. While you might be more comfortable with the level of return volatility, as depicted in the chart above, less diversified investors should be more worried.

The current valuation provides a balanced risk-reward. Though, investors can accumulate more shares on further dips.

If you like my article and would like to stay up-to-date on the next one, you can click the "Follow" button next to my profile.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.