A Cybersecurity Stock Perfectly Placed with A Large Recurring Revenue Base and High Visibility

In the present scenario, computer security is not only a priority but a big business prospect as well, with the companies engaged in the business becoming indispensable. Amid the growing concern of Covid-19 and the mounting need of digital transformation, there is a company constantly on the move, proving its leadership and might in the segment, providing over 16 per cent YTD return and displaying a consistent financial performance.

• Avast PLC a global leader in consumer cybersecurity with over 435 million users worldwide
• A company having a large recurring revenue base with high visibility
• Belongs to a promising sector whose revenue has increased by 46 per cent from £5.7 billion in 2017 to £8.3 billion in 2019
• Has a differentiated business model with a flexible online sales and distribution approach
• The stock has given over 71 per cent return in last year while its YTD return has been +16 per cent.

Avast Plc – a company with long term vision and growth prospect

Avast Plc, a global leader in consumer cybersecurity, has grown from a visionary start-up to become one of the world’s largest cybersecurity companies, providing digital security and privacy products with over 435 million users worldwide.

The company provides multi-layer protection against malware and cyber-attacks by leveraging machine learning and artificial intelligence. The company has a dedicated pool of data scientists, threat researchers, and machine learning experts, who are aided by its massive amounts of data and bespoke cloud-based infrastructure, providing the company with a competitive edge in the industry.

Its focus is primarily on five key research areas:

The company has in-depth knowledge of the IoT landscape and vulnerabilities. It possesses the ability to defend against different attacks through its state-of-the-art infrastructure and access to a vast amount of security data.

Firm Financials Validate the Growth and Success of The Company

Avast has diversified product bouquet along with an increasing Customer Monetization such as the distribution of third-party software and mobile advertising. For the year ended 31 December 2019, the adjusted billings of the company improved by 10.2% on an organic basis (actual 5.7%) to $911.0 million from $862.1 million in 2018.

The company has a large recurring revenue base with high visibility and has been showing consistent margin expansion as well. The adjusted revenue reported a surge of 9.1% in 2019 (actual 5.6%) as compared to the previous financial year.

The adjusted EBITDA increased by 7.9% to $483.0 million, and the Adjusted net income surged by 19% to $322.3 million.

(Data Source: Company Release)

For the first quarter ending 31 March 2020, the revenue performance was in line with expectation at $214.6 million, up by about 6.5% (actual 1.3%) of $211.8 million in the same quarter last year. On the same time, the Adjusted EBITDA increased by 3.1% to $121.2 million, resulting in an Adjusted EBITDA margin of 56.5% for the reported quarter. While the billings growth remained slightly higher of revenue at the Group level. Though, the weaker trends in SMB (small and midsize business) and the mobile carrier business, led the company to continue only with its previous guidance for FY2020 of mid-single-digit organic revenue growth.

The group has been maintaining a strong and liquid balance sheet with cash of $262.6 million at the quarter-end and held a comfortable Net debt/ LTM adjusted EBITDA of 1.7x.

At a crisis time when many of the companies deferred or stopped the dividend payment altogether, Avast retained its recommendation for the payment of a final 2019 dividend of 10.3 cents per share.

A milestone achieved - Avast Enters the FTSE 100

The company, which joined the premier London Stock Exchange (LSE) just two years back in May 2018 and was placed as a member of FTSE 250, achieved the milestone of becoming a constituent of the FTSE 100 index on 22 June 2020. The promotion to the FTSE 100 from FTSE 250 marked the growing recognition of the company’s success in the digital world. The company though has substantially outperformed the FTSE 250 in the previous year, its inclusion to FTSE 100 is likely to have a long-term impact on stock returns, with increased investor interest and result of the index tracking.

Cybersecurity - An Industry Whose Success Speaks for Itself

The British cybersecurity industry has grown many folds in the last couple of years, the industry as per the estimates of Department for Digital, Culture, Media and Sport is presently worth £8.3 billion. The sector whose revenue has increased by 46 per cent from £5.7 billion in 2017, currently employs 43,000 people on a full-time basis. The passing year was a record year for the sector, as it garnered a whopping £348 million of investment. In the last four years 2016-19, the industry has amassed an investment of £1.1 billion, evidence of the growing confidence in the industry.

The rise in cyberattacks incidence, growing penetration of smartphones, and increasing culture of BYOD (Bring your own device) in various enterprises have been driving the market of the cybersecurity, and there has been considerable investment in early-stage companies due to that. The sector has gained importance not only to businesses but for the country’s thriving digital economy as well. The government, on its part, has constantly been supporting the sector with funding for growth from government accelerators, market research from Innovate UK and government-aided Cyber Growth Partnership.

Conclusion

The coronavirus pandemic not only made people concerned about health hazards but cybersecurity as well. It was the internet, which kept on working when every other means of physical communication stopped, connecting, and making the world keep ticking during the lockdown. Our reliance on the internet suddenly increased manifold and it equally became important to protect our sensitive data and personal information from cybercriminals who are on the prowl.

Avast, as a leading cybersecurity business, is strongly positioned to take advantage of huge and growing market opportunity of the business, with new growth avenues arising in the form of IoT and Smart homes. The business model of the company benefits from recurring subscription revenue, generating significant levels of cash. In the first quarter, the results were a bit impacted by the weaker trend in the SMBs, but they are also expanding into network security.

There are many factors that go in favour of the company; it has a high level of brand awareness and leadership status, a mass global acceptance and user footprint. The company has strong competitive moats. Most importantly, it holds a differentiated business model with a flexible online sales and distribution approach. So far, the financials are concerned; it has been a consistent performer and possesses a strong balance sheet. It also has a better profitability outlook backed by cost-effective go to market approach and is well-positioned to seize the upcoming growth opportunities in the market.

Though no business is risk-free, and the industry which till recently was having a high entry barrier is witnessing flush of new players every day. Even though brand matters the most here, the role of cost cannot be denied, which can be a sort of challenge to the established incumbents as well. So far it has been good going for the company due to its inherited growth prospects, and we can expect further positive developments on operational as well as the financial front, in its next scheduled update for the results of the six months to 30 June 2020 on 12 August 2020.

Avast Plc (LON:AVST) ended the session at GBX 554.00, up by 1.19% on 9 July 2020, at a P/E multiple of 28.64x and with Annual Div. Yield of 2.12%. The stock has given over 71 per cent return in last year while its YTD has been over 16 per cent.