Tenable Holdings, Inc. (NASDAQ:NASDAQ:TENB) is a leading cybersecurity company that helps organizations assess and protect their “cyber exposure”. The cybersecurity industry is forecast to grow at over 18% CAGR through 2027 and reach its reach valued at $298 billion by the end of the period. Tenable recently reported strong second-quarter 2022 financial results, beating both revenue and earnings estimates. In this post, I’m going to break down the company’s business model, finances, and valuation, so let’s dive in.
Secure business model
Enterprise environments are expanding from on-prem to cloud, from containers to web applications. The distributed network has a wider “attack surface” and thus offers more opportunities for hackers. Tenable has created a “Cyber Exposure” platform that brings together its diverse products into one solution to offer: Vulnerability Management, Web App Scanning, Cloud Security, and Active Directory.
The Tenable Lumin platform combines all of this with a “cyber exposure” score. This can be tracked using historical metrics to see improvements over time. This unified view provides customers with a “single pane of glass” to view all vulnerabilities across their network.
Tenable’s flagship Vulnerability Assessment (Nessus) has been ranked a Customer’s Choice for the past three years in a row. Additionally, it has a 4.5 star rating out of 5 and the second largest number of reviews.
The company recently acquired Bit Discovery, which helped the company cover internet-connected assets such as web applications, cloud resources, and open gateways. This allowed the Nessus platform to be upgraded to an expert version.
Tenable’s growth strategy leverages the Vulnerability Assessment solution (Nessus) as a cost-effective entry point into the larger enterprise platform. This classic “land and expand” approach has worked well so far, as the company has over 40,000 customers worldwide. His clients include 60% of the Fortune 500, 40% of the Global 2000 and many major government agencies.
The Total Addressable Market (“TAM”) via “Cyber Exposure” is $25 billion. Given that the company only made $611 million in trailing-12-month revenue, its potential growth potential is huge.
Tenable delivered strong financial results for the second quarter of 2022. Revenue was $164.3 million, beating analyst estimates by $1.08 million and up 26% year over year.
The majority (95%) of this revenue is recurring, which is up 1% year over year, making the financials more consistent. Billings grew to $174.1 million, a rapid 27% year-over-year growth.
The company added 540 enterprise customers during the quarter, with 79 new six-digit customers. The number of customers with annual contract value of more than $100,000 also increased by a remarkable 28% year-over-year.
The company generated a GAAP loss from operations of $23.2 million as it aggressively invests for growth. However, on a normalized basis, earnings per share [EPS] It was normalized at $0.05, beating analyst estimates by $0.04. Unlevered free cash flow was $29.1 million at an 18% margin, up 6% year over year, which is a positive sign.
Tenable has a solid balance sheet with $511 million in cash and short-term investments and $423 million in total debt.
For full-year 2022, management expects revenue of between $673 million and $679 million, up 24% year over year.
To score Tenable, I fed the latest financial data into my advanced valuation model, which uses the discounted cash flow (DCF) valuation method. I have projected sales growth of 24% per year for the next 5 years.
I’ve also forecast that operating margin will increase to 23% over the next 7 years, which is in line with the software industry average. I expect this to be driven by increasing operational leverage over time and the return on Tenable’s investment strategy. It should be noted that this margin includes an adjustment for R&D costs that I have enabled.
Given these factors, I’m getting a fair value of $41 per share. The stock is currently trading at $40 per share, making it ~4% undervalued.
As an additional data point, Tenable is trading at a price-to-sales multiple of 7, which is 9% cheaper than its 5-year moving average. Compared to industry peers, Tenable trades on the lower end of the valuation spectrum. For example, Qualys (QLYS) trades at a P/S ratio of 12.4, which is more expensive. Rapid7 (RPD) is trading slightly cheaper with a P/S ratio of 4.7.
The competition in the cybersecurity industry is increasing and there are a number of fragmented solutions. This additional choice could lower the return on investment for each individual player in the industry.
Recession/slowdown in IT spending
With many analysts forecasting a recession, expect a temporary slowdown in IT spending. I expect this to be driven by longer sales cycles as decision makers are more hesitant to buy products. The good news is that the long-term trend of rising security spending is increasing.
Tenable is Gartner’s leader in vulnerability analysis, which allows them to get their “foot in the door” for upsell opportunities despite the competitive landscape. The management is doing well and the industry tailwind means there is plenty of room for future growth. The stock is undervalued on its own and relative to historical metrics, so it could be a good buy over the long term.