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After This Misstep, Can CyberArk Software Turn it Around?

What was turning into a solid year for Israeli cybersecurity firm CyberArk Software (NASDAQ: CYBR) soured in mid-July when the company gave a disappointing preview of its second quarter. The numbers show a healthy business that is still growing but also expose a stock that could be overvalued based on its future outlook. 

When good isn't good enough

The cybersecurity industry is turning in solid gains so far in 2017. Business is on the rise, led by legitimate fears over hacking and other cybercrime.

Data by YCharts.

CyberArk has found its niche in providing software that protects an organization's internal information and privileged account access. The company boasts a global presence and serves more than half of the United States' 100 largest companies.

Image source: Getty Images.

Business has been great, with revenue more than doubling since the initial public offering in late 2014. However, when the second quarter of 2017 was previewed on July 13, the final number for revenue was expected to fall between $57 and $57.5 million. That's a full $4 million below guidance and only about 13% to 14% higher than the prior year quarter.

There are plenty of companies that would be happy with that kind of double-digit top line growth, but CyberArk shareholders have grown accustomed to 20%-plus growth for years.

What's up with the stock?

The business itself is clearly not to blame here. In the earnings preview, CEO Udi Mokady said the blame for the miss was due to deals in Europe, the Middle East, and Asia closing slower than anticipated. We'll have to wait until Aug. 8 for the full report and more details, but that sounds like the revenue will still show up but perhaps in later quarters this year.

Investors were edgy before the press release even came out, though, as sales have continued to trend lower. The miss stoked fears that the slowdown is worsening.

Time Period

Year-Over-Year Revenue Increase

Q2 2017 (expected)

13% to 14%

Q1 2017

26%

Full Year 2016

35%

Full Year 2015

56%

Data source: CyberArk quarterly earnings. Chart by author. 

It's worth noting that if CyberArk's numbers do stay down, that wouldn't be abnormal. According to security research firm Cybersecurity Ventures, the industry will grow 12% to 15% through 2021. In addition, competition is picking up as bigger software companies bet on their own cybersecurity offerings to cash in on the trend.

With a price-to-sales ratio of 6.5 -- compared to just 2.1 for the S&P 500 -- investors need more robust top line growth to justify current share prices.

It's not all bad

However, one reason for optimism is that in spite of a slowdown, CyberArk is profitable. That's in stark contrast to the industry overall, which is chock-full of names that are running in the red or on paper thin margins:

Company

Trailing 12-Month Price-to-Earnings

CyberArk

48.5

Palo Alto Networks (NYSE: PANW)

N/M

FireEye (NASDAQ: FEYE)

N/M

Barracuda Networks (NYSE: CUDA)

121.9

Fortinet (NASDAQ: FTNT)

104.1

Data source: Yahoo! Finance. Chart by author. 

Trading at 49 times trailing earnings doesn't exactly make CyberArk a steal, even if it's more profitable than its peers. This number can be misleading, however, as the company heavily invests for future growth. When factoring for that, we are left with the more insightful metric -- price-to-free cash flow -- which sits at 29 at the moment. Still not a bargain but reasonable for a business that is growing double-digits.

CyberArk is still a healthy and growing company -- there's no doubt there. If fuel is starting to run low on the top line, the stock could be overvalued at these levels, but it's still too soon to tell. Investors need more clarity on what caused the hiccup this past quarter and what to expect going forward. In about a week, we should get some color on whether to be worried or if this is just a bump in the road.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool recommends CyberArk Software, FireEye, Fortinet, and Palo Alto Networks. The Motley Fool has a disclosure policy.