NTCT - NetScout: Mixed Read-Throughs From Analyst Consensus Revisions

2023-10-02 07:40:25 ET

Summary

• The consensus earnings estimates for NetScout Systems in subsequent quarters and the current fiscal year have been revised upwards in recent times.
• But NetScout's valuations aren't deemed to be appealing, given that the consensus price target for the stock implies a modest upside of +14%.
• NetScout's shares continue to be rated as a Hold; the improvement in NTCT's short-term prospects isn't sufficient to justify a Buy call for the stock.

Elevator Pitch

I rate NetScout Systems, Inc. ( NTCT ) stock as a Hold.

Previously, I did a preview of NTCT's financial results for the first quarter of fiscal 2024 (YE March 31) with my initiation article written on July 19, 2023.

With the latest update, I come to the conclusion that NetScout's shares are still at a fair valuation, although its near-term prospects have improved. NTCT stuck to its initial financial guidance for FY 2024, and the consensus bottom line estimates for the company were increased significantly in recent months. But NetScout's earnings growth is still expected to slow considerably in the coming years, and this justifies a lower P/E multiple for the stock. This explains why I have maintained my Hold rating for NetScout stock.

Consensus Financial Forecasts And Price Targets

There are mixed read-throughs from changes to the sell-side's target prices and financial projections for NetScout.

On one hand, Wall Street has become more optimistic about NTCT's short term financial prospects.

NetScout's consensus full-year FY 2024 normalized earnings per share or EPS estimate was raised by +8.9% to $2.27 in the past three months. Moreover, the consensus Q2 FY 2024 and Q3 FY 2024 bottom line projections for NTCT were revised upwards by +11.2% and +11.0% , respectively during the same time period.

On the other hand, the analysts don't think that NetScout has meaningful capital appreciation potential.

The current market's consensus price target for NTCT is $32.00 , which is equivalent to a potential upside of +14% as compared to NetScout's last traded share price of $28.02 as of September 29, 2023. Typically, an investor will demand at least a +20% return before considering an investment in any listed company. It is also noteworthy that the sell-side's consensus target price for NetScout was higher at $33.50 at the beginning of this year.

In summary, NetScout's outlook for the near term appeared to have improved, but the market still doesn't view NTCT's current valuations as very attractive. I will evaluate NetScout's financial outlook and valuation metrics in the subsequent two sections of this article.

FY 2024 Financial Outlook

At the company's most recent Q1 FY 2024 earnings call , NetScout acknowledged that it has to "manage through the dynamic macro environment" for the foreseeable future.

Nevertheless, NTCT's Q1 FY 2024 top line and bottom line beat Wall Street's expectations by +1.9% and +1.6% , respectively. More significantly, NTCT left the mid-point of its full-year FY 2024 revenue ($930 million) and normalized EPS ($2.26) guidance unchanged.

NetScout specifically mentioned in its Q1 FY 2024 earnings presentation slides that the company recently brought its "next-generation Omnis Cyber Intelligence" solution to the market.

The Key New Features Of NetScout's Next-Generation Omnis Cyber Intelligence Solution

The company's Cybersecurity segment had underperformed in the first quarter of fiscal 2024. As disclosed in its quarterly results presentation, sales earned from NetScout's Cybersecurity segment declined by -11% YoY for Q1 FY 2024, while NTCT's Service Assurance segment revenue still grew by +2% YoY in the same time frame. But the prospects of NTCT's Cybersecurity segment might become brighter going forward, as a result of its next-generation Omnis Cyber Intelligence solution.

NTCT revealed at its most recent quarterly results call that only "a small single-digit percentage" of the company's Cybersecurity segment revenue for FY 2023 was derived from its Omnis Cyber Intelligence" solution. Therefore, it is reasonable to expect NetScout's revenue for the Omnis Cyber Intelligence and the Cybersecurity segment to be higher for fiscal 2024 vis-a-vis FY 2023, thanks to the re-introduction of Omnis Cyber Intelligence solution which comes with new features to attract new clients. Indeed, NTCT has guided that the top line expansion for its Cybersecurity segment should be superior to that of the company as a whole for FY 2024, as per its management commentary at the first quarter results briefing.

Therefore, it is not a surprise that the Wall Street analysts have increased their Q2 FY 2024 and full-year FY 2024 earnings estimates for NetScout as outlined in the previous section of this article.

Valuation Metrics

There are good reasons for NTCT's limited upside potential as per a comparison of its share price with the consensus price target detailed in an earlier section.

The consensus forward next twelve months' normalized P/E multiple for NTCT is 11.9 times. In contrast, NetScout boasts a consensus FY 2023-2026 EPS CAGR of +3.0%. These metrics are sourced from S&P Capital IQ .

At its Q1 FY 2024 earnings briefing, NetScout shared that the company's $16 million backlog as of end-June was just slightly higher than its historical mean backlog range in the $10-15 million for the past decade. The company's backlog has normalized in the post-COVID era and is no longer at the high end of its historical range. It is understandable why analysts have muted expectations of NTCT's future earnings growth for the next couple of years.

NetScout's five-year average forward P/E was 16.2 times (source: S&P Capital IQ ). As a comparison, the company's actual bottom line or normalized EPS growth rates for FY 2020, FY 2021, FY 2022 and FY 2023 were +13.8%, +8.3%, +8.2%, and +18.5%, respectively. As such, NTCT's current P/E of 11.9 times is fair; the stock should command a lower valuation multiple as its earnings growth moderates to the low single-digit percentage level.

Concluding Thoughts

I retain a Hold rating for NetScout. The company's financial outlook for the short term has gotten better. However, it is natural that NTCT's bottom line performance for the next few years won't be strong as what the company achieved during the COVID-19 period. This means that valuation multiple de-rating for NetScout is unavoidable, so I continue to have a Neutral view of NTCT.

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