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Perhaps this is the first you’ve ever heard of Gen Digital (GEN 0.51%) stock, the company formerly known as NortonLifeLock (and before that, Symantec). In a year in which tech stocks are getting absolutely clobbered, this cybersecurity specialist is down 17%, compared to a 19% decline for the S&P 500 and a nearly 32% plunge for the Nasdaq Composite.
Despite the relative outperformance, Gen Digital is no high-growth business. However, it has some lofty goals for turning a higher profit over the next couple of years, which is what has some investors optimistic. Is the stock a buy for 2023?
Gen Digital (an abbreviation for Generation Digital, a reflection of the company’s goal to keep consumers around the globe safe in what has become a very digital world) recently completed its rebrand after merging with fellow cybersecurity company Avast. A few years ago, the business was known as Symantec. Semiconductor designer and enterprise software company Broadcom (AVGO 2.90%) purchased the enterprise security segment from Symantec, leaving the leftover consumer security brands as NortonLifeLock. Now paired up with Avast’s consumer software, Gen Digital is a leader in individual and small business security software.
Brands under Gen Digital’s umbrella include Norton, Avast, LifeLock, Avira, AVG, and CCleaner. The company is dually headquartered in Arizona and in the Czech Republic.
The merger with Avast — which was previously a publicly traded company in Europe — was revealed to cost $6.55 billion net of cash on Avast’s balance sheet in Gen Digital’s Q2 fiscal 2023 earnings report (for the three months ended September 2022).
Gen Digital is not the fastest-growing cybersecurity company out there. In the last quarter (which includes a few weeks at the end of the period with contribution from Avast), revenue increased 12% year over year when excluding the effects of currency exchange rates. Avast accounted for 7 percentage points of that growth, so in constant currency revenue would have been up 5% excluding the merger.
When accounting for the record run-up in the U.S. dollar, actual reported revenue for Q2 fiscal 2023 was $748 million, an 8% increase from last year. Adjusted operating profit was up 7% to $388 million, and adjusted earnings per share rose 5% to $0.45. The slower growth rates are in keeping with the consumer cybersecurity space. The real growth these days is in big business security for the cloud.
Nevertheless, while this business keeps customer data locked up from the bad guys, the market has been optimistic about Gen Digital’s opportunity to unlock profitability. During the last earnings call, management said NortonLifeLock and Avast tech systems have been merged, creating annualized savings of over $300 million. Marketing efforts and other brand integrations are also being worked on, which gives the company’s C-suite confidence it can save another $200 million over the next two years.
As of this writing, shares of Gen Digital trade for just under 22 times trailing-12-month earnings per share, or just under 17 times trailing-12-month free cash flow. A boost from combining sales and profit from two security software companies together will be in effect until autumn of calendar year 2023, so the stock could get quite cheap over that course of time, assuming the share price stays the same.
This company is all about slow-and-steady revenue growth but faster profit growth. Through the first half of 2022, Gen Digital generated $0.90 in adjusted earnings per share (EPS). The outlook for fiscal Q3 2023 calls for another $0.45 in adjusted EPS, so let’s assume $1.80 in adjusted EPS is where Gen Digital lands for the full-year period.
Management believes that by the end of fiscal 2025 (midyear calendar 2025), it will be generating $3 in annualized adjusted EPS (or $0.75 per quarter). That’s 67% more adjusted EPS on a quarterly basis than it’s reporting right now.
That implies about 30% average adjusted earnings-per-share growth in Gen Digital’s fiscal 2024 and fiscal 2025. If the company can pull it off and then settle into a mid-single-digit percentage growth rate beyond that, this could be a cheap cybersecurity stock right now.
However, there are a few risks to bear in mind.
Consumer security software, as mentioned before, is no growth industry. Gen Digital does plan on using some of its savings to develop new products, including for small businesses. But there is plenty of competition in this arena despite this market being sluggish in nature. Profitable growth is far from guaranteed, especially once the synergies from merging with Avast are realized.
Gen Digital also has a bit of a messy balance sheet, with $1.1 billion in cash and short-term investments and just over $10 billion in total debt. But for what it’s trying to accomplish, Gen Digital has ample liquidity on hand. In the last quarter, shareholders were given a $0.125-per-share dividend (currently a 2.3% annualized yield) and $73 million of stock was repurchased.
Over the next few years, I don’t believe Gen Digital will be a massive market-beating investment over the long term. If the global economy stabilizes after what is expected to be a mild recession in 2023, I think faster-growing and highly profitable cybersecurity stocks will rocket higher.
However, if you’re looking for a more defensive holding in the cybersecurity industry, Gen Digital could be a cheap stock with a clear path to unlocking lots more profit in the next two to three years. Keep this one on your watch list.
Nicholas Rossolillo and his clients have positions in Broadcom. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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