Since September 2024, Tenable has been in a holding pattern, posting a small loss of 4.6% while floating around $38.04. The stock also fell short of the S&P 500’s 5.6% gain during that period.
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We're swiping left on Tenable for now. Here are three reasons why TENB doesn't excite us and a stock we'd rather own.
Why Is Tenable Not Exciting?
Founded in 2002 by three cybersecurity veterans, Tenable (NASDAQ:TENB) provides software as a service that helps companies understand where they are exposed to cyber security risk and how to reduce it.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Tenable grew its sales at a 18.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Tenable’s revenue to rise by 8.8%, a deceleration versus its 18.5% annualized growth for the past three years. This projection is underwhelming and indicates its products and services will face some demand challenges.
3. Breakeven Operating Raises Questions
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Tenable was roughly breakeven when averaging the last year of quarterly operating profits, mediocre for a software business. This result is surprising given its high gross margin as a starting point.
Final Judgment
Tenable’s business quality ultimately falls short of our standards. With its shares underperforming the market lately, the stock trades at 4.8× forward price-to-sales (or $38.04 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.
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