Varonis Systems’s stock price has taken a beating over the past six months, shedding 35.7% of its value and falling to $33.55 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Varonis Systems, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Varonis Systems Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Varonis Systems. Here are three reasons you should be careful with VRNS and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within software, a stretched historical view may miss new innovations or demand cycles. Varonis Systems’s recent performance shows its demand has slowed as its annualized revenue growth of 11.7% over the last two years was below its five-year trend.
2. Shrinking Operating Margin
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, Varonis Systems’s operating margin decreased by 2.7 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Varonis Systems’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 22%.
3. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Varonis Systems’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 21.6% for the last 12 months will decrease to 20.9%.
Final Judgment
Varonis Systems’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 5.7× forward price-to-sales (or $33.55 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Varonis Systems
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