Cybersecurity Demand Surge And Profitability Growth Make NortonLifeLock Stock A Smart Buy
Up 60% from its low in March 2020, at the current price of $27 per share, we believe NortonLifeLock stock (NASDAQ: NLOK) has further upside potential. NortonLifeLock, a cybersecurity software and services provider, has seen its stock rise from $17 to $27 off its March 2020 low, less than the S&P which increased by almost 90% from its lows. Further, the stock is up only around 30% from the level it was at before the pandemic. We believe that NLOK stock could rise at least 10% to set fresh highs above $30, driven by expectations of steady demand growth, and strong full-year 2021 earnings. Our dashboard What Factors Drove 44% Change In NortonLifeLock Stock Between 2018 And Now? has the underlying numbers behind our thinking.
NLOK stock’s rise since late 2018 came despite roughly unchanged revenues, which stood at around $2.6 billion in FY 2019 and FY 2021 (NLOK’s fiscal year ends in March). However, combined with a 3.5% drop in the outstanding share count, RPS (revenue-per-share) rose 3%, from $4.20 to $4.30 over this period.
However, NortonLifeLock’s P/S (price-to-sales) multiple jumped from 4.3x in 2018 to 4.9x by 2020 end, and has since rallied to 6.3x currently. We believe that the company’s P/S ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns has led to work-from-home becoming the new norm, thus raising the need for cybersecurity products. NortonLifeLock sold off its enterprise security business and now focuses solely on consumer security, the demand for which has risen with people shifting to the remote work model. This is evident from the company’s full-year 2021 earnings, where revenue came in at $2.55 billion, up from $2.49 billion in FY 2020. A significant drop across all expense heads saw operating income rise sharply from $355 million to $896 million. However, a $540 million drop in other income over this period meant that despite a drop in the effective tax rate, EPS only rose from $0.94 to $1.18.
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Additionally, we believe demand for the company’s products will stay strong, and that revenues stand to benefit in the near-to-medium term. Further, if the company can continue controlling operating expenses going forward, a rise in investor expectations could drive up the company’s P/S multiple, helping the stock rise to fresh highs above $30, an upside of more than 10% from present levels.