TENB - Tenable: Still A Buy With Macro Headwinds Priced In

2023-12-27 11:16:29 ET

Summary

• We continue to be buy-rated on Tenable.
• 3Q23 results and outlook lead us to believe that macro headwinds have now been priced into the stock.
• We think TENB is better positioned to outperform in FY24 as the IT spend environment recovers.
• Additionally, we think TENB poses as the better pick in comparison to QLYS in the Vulnerability Management space at current levels.
• We see a more favorable risk-reward profile for the stock in 2024.

We're maintaining our buy rating on Tenable ( TENB ). We think the stock is better positioned to outperform given the growth opportunity in Vulnerability Management, particularly after 3Q23 results and outlook.

In spite of its pullback this year, TENB remains a leader in the vulnerability management market, which is increasingly becoming a top IT spending priority as the threat landscape for enterprise security expands. The security and vulnerability management market is estimated to grow at a CAGR of 7.5% between 2023-2028. Our positive thesis from last October regarding TENB's focus on newer asset classes such as containers, microservices, operational technology, and active directories paying off has been slower than expected to materialize due to macro headwinds this year. Still, we continue to believe that TENB is a defensive stock, i.e., the stock will be relatively resilient even in times of recession due to the need for security spend on vulnerability management. We're specifically constructive on customers' willingness to spend more on vulnerability management or VM as enterprise spending bounces back next year; Federal Reserve Chair Jerome Powell noted that he " sees a path toward a so-called soft landing, where the Fed is able to bring inflation down to its 2% target without a huge hit to economic activity. " Whether the recession narrative plays out or not, we think TENB stock has priced in the macro uncertainty, and hence, we see more room for upside based on the lower expectations coupled with the growth market opportunity for VM.

Over the past five years, TENB revenue grew at 22% per year, well above average pre-profit companies; we're particularly bullish on TENB now as we think the company's growth rate is doing better recently and will continue to catch momentum in 2024 with the macro recovery. Shareholders have received a total shareholder return of 31% in one year, which beats the annualized return of 16% over five years, which reflects that TENB is now doing better.

We think the company's outlook has been de-risked and see more room for upside now after the November pullback priced the macro weakness into the stock. TENB stock has performed relatively in-line since our buy rating last October, up 27% versus the S&P 500, up 24% during the same period. The stock is gaining more momentum now after investors' confidence in the company's market opportunity boomed post-earning results. Over the past six months, the stock has outperformed the S&P 500 by 7%, while it underperforms the S&P 500 by 7% over the past three months. We see attractive entry points at current levels for investors to ride the upward trend in FY24. The following chart outlines TENB stock against the S&P 500 over the past six months.

We see more material outperformance in 2024 and recommend investors explore entry points on pullbacks. In contrast, the following graph outlines TENB stock against the S&P 500 over the past three months.

This quarter, the company reported on November 1st revenue of $201.53M, up 15.3% Y/Y and ~3% QoQ; we recognize the trend of slower top-line growth % in FY23, down an ~18% Y/Y growth last quarter, but we expect top-line growth will remain in the teen percentage range into FY24 so we're not too concerned about the slower rate in the current FY. We think TENB's shares will recover ahead of its business and recommend investors take advantage of the pullback.

We think TENB's business and that of its peer group fulfill a need for continuous attack management; we see more customer traction for TENB's Tenable One, which works as a 360-degree holistic exposure management platform to extend an organization's visibility across the modern attack surface, prevent attacks, and communicate cyber risk to support optimal business performance. Management reported adding 386 new enterprise platform customers this quarter, led by large deals with 58 net new six-figure customers. Additionally, we think TENB's launch of its ExposureAI earlier this quarter will drive customer spend; the company introduced its new layer of generative AI capabilities across its cybersecurity exposure management portfolio, which will be incorporated into Tenable One. We believe integrating AI will help increase its visibility within the market and enable the company to keep up with the competition, specifically Qualys ( QLYS ). Management now guides for $204M to $208M in revenue next quarter. We expect the top line to recover, driven by better enterprise IT spending next year.

Risks to Our Buy Rating

TENB is not without risk, in our opinion. The stock remains vulnerable to increased competition with QLYS and macro headwinds. We think now TENB provides a unique window in which it presents a more favorable risk-reward profile than QLYS, as the latter already ran up on the expectation of recovery, and we see little room for upside surprise there. Meanwhile, TENB stock has priced in macro headwinds, dropping +15% in early November post-earnings, and still has yet to ride the upward trend of the expanding market opportunity in VM. However, if the macro backdrop worsens in 2024, we think TENB will continue to see a slower pace of revenue growth, which will concern investors over the company's ability to convince customers to spend on the platform. Our research leads us to believe the macro uncertainty will ease towards 2H24, and we're more confident about TENB's resilience in the near term.

Valuation

TENB is relatively cheap, in our opinion. The stock is trading at 5.6x EV/C2024 Sales versus the peer group average of 9.0x. We think TENB provides attractive entry points to jump into the growth opportunity in exposure management, particularly in comparison to rival QLYS trading at 11.4x. While TENB provides a longer growth runway as deal cycles and enterprise budgets continue to be impacted by the macro backdrop, we think TENB stock will fare better in 2024 now that expectations have been reset after the small run-up post-2Q23. We see the stock re-rating higher in 1H24 to the mid-50s range. We recommend investors explore entry points at current levels.

The following outlines TENB's valuation against the peer group average.

Word on Wall Street

Wall Street shares our bullish sentiment on the stock. Of 20 analysts covering the stock, 15 are buy-rated, and the remaining are hold-rated. The stock is currently priced at $47 per share. According to Refinitiv data, the median sell-side price target is $50, while the mean is $51, with a potential 7-9% upside.

The following charts outline Wall Street's sentiment on the stock.

What to Do With the Stock

We continue to be buy-rated on TENB. Looking forward, we see the stock faring better in FY24 than it did this year due to:

1. enterprise spend recovery,
2. stretched-out visibility after the introduction of ExposureAI,
3. and expanded threat landscape, growing the market opportunity in VM.

We see these three factors intersecting in 2024 to drive TENB's outperformance. We recommend that investors take a small position, given a reasonable valuation and expanding market opportunity in VM. We think TENB is more likely to see an upside surprise than its immediate peer group due to its reset expectations and pullback after 3Q23 results early this November. We expect management to provide a better-than-expected outlook for 1Q24 and FY24 next quarter. We see a more favorable risk-reward profile for the stock in 2024.

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