Growing a business is no easy feat with inflation at elevated levels and interest rates continuing to rise. Therefore, as earnings announcements for the latest quarter kicks into high gear, investors are learning exactly how well companies are managing this difficult environment.
Cybersecurity leader Tenable (TENB 2.15%) reported its results on April 24, and its stock price sank 19% the following day on the back of disappointing forward guidance, which spooked investors.
Tenable stock is now down 40% from its all-time high, having begun its slide last year alongside the rest of the technology sector. But the cybersecurity industry might be one of the best places to invest over the long term, so despite the company's sluggish outlook, here's why Tenable stock is a buy on the dip.
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The leader in a key segment of cybersecurity
As companies continue to shift their operations online using cloud computing technology, they're more vulnerable than ever to attacks on their valuable assets. In the past, businesses used local networks and on-premise infrastructure which often ring-fenced them from external hackers. But in the cloud, malicious actors can strike from anywhere in the world and at any hour of the day.
Despite the risks, there's no going back. Operating online allows businesses to reach a global customer base, and it connects their teams around the world, which makes collaborating easy. Therefore, the only option companies have is to ensure they're adequately protected.
Traditional cybersecurity software that waits around for attackers to strike won't suffice. The technology modern organizations need is vulnerability management, which is a proactive tool that constantly hunts for potential threats. Tenable's Nessus platform is the top product in that category. It's the most accurate in the industry with the lowest rate of false positives, and it protects against over 76,000 common vulnerabilities and exposures, which is more than any competitor.
It's also the most widely deployed. Tenable products are used by more than 43,000 companies worldwide, and Nessus was the on-ramp for many of those customers. Nessus is a tool that can be applied in any business, but Tenable has also built an entire portfolio of industry-specific cybersecurity software to serve customers operating in financial services, energy, manufacturing, and beyond.
Last year, the company also launched Tenable One, an all-in-one platform combining five of its most popular products, from vulnerability management to identity protection. It's designed to capture those customers looking to consolidate their cybersecurity spending into one service, and the company says it continues to gain traction.
Tenable cut its 2023 revenue outlook
Tenable delivered $188.8 million in revenue during the first quarter of 2023, which was above the high end of its guidance. Therefore, investors weren't expecting the company to reduce its forecast for the 2023 full year. It now expects $785 million in total revenue, down from $810 million in its prior outlook.
However, Tenable didn't change its free cash flow guidance, which suggests the company will be focusing more on profitability by spending less money on growth initiatives like marketing and hiring additional employees. That's a common theme in the technology sector at the moment, with companies racing to cut costs to counteract the uncertain economic environment. So far, the tech industry has slashed almost 184,000 jobs in 2023, which is more people than it laid off in the whole of last year.
In Q1, Tenable increased its operating expenses by just 14%, which was a slower rate than its revenue growth. While that didn't result in the company achieving GAAP (often called "true") profitability, it was profitable on an adjusted basis after excluding non-cash expenses like stock-based compensation.
In short, Tenable appears to be sacrificing some growth in the future in exchange for running a leaner business now, which is prudent in this economic environment.
Why Tenable stock is a buy on the dip
Every year for the last 26 years, global consulting firm PwC has surveyed thousands of top corporate executives to assess their views on the economy, politics, and risks to their businesses. In the 2023 edition, 25% of the 4,410 respondents said their organization would be either highly or extremely exposed to cyber risks over the next five years.
Investing more in cybersecurity was their No. 1 strategic move to protect their businesses from risks associated with geopolitical conflicts.
That sentiment was also reflected in a survey conducted by Morgan Stanley last year. The Chief Information Officers surveyed said cybersecurity software is the last expense they intended to cut from their budgets in tough economic times, even if a recession strikes.
The demand for cybersecurity software could not be clearer. Companies view it as a necessity, and Tenable is a leader in one of the most important segments. In fact, the company has 1,444 customers spending at least $100,000 per year on its products, and it added 24 of them in Q1 alone -- which was more than it added in the same period last year.
It shows that despite Tenable's slowdown in overall revenue growth, its customers with larger, more complex organizations haven't stopped investing in protection. When the broader macroeconomic environment improves, Tenable will likely see its growth reignited. At the same time, it will have a healthier business because of the prudent cost management it's practicing now.
With the stock down 40% from its all-time high, this could be a great chance for investors to buy in for the long term.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
