I last wrote about cybersecurity solutions provider Sophos Group (LSE: SOPH) in July when the share price had plunged around 20% on the release of the first-quarter trading update. Earnings and business volumes had grown but fallen below expectations. The underlying growth story in the business was good, but the valuation was high, so all the pressure was on the downside.
I concluded that article by saying that even after the share-price fall, the forward price-to-earnings ratio (P/E) was around 50, which meant the shares weren’t cheap when measured against the “green-shoot” earnings the firm was posting. However, I thought there was a “tangible” growth story unfolding and was keen to keep an eye on the stock with “the idea of picking up a few shares at opportune moments.” Fast-forward and essentially, the share price moved sideways before plunging more than 25% today on the release of the half-year report. Let’s check back in to see what the company said.
At first glance, the figures look promising. Revenue grew almost 18% compared to the equivalent period the year before and profit before tax came in at $26m compared to a loss of $35.5m the year before. At constant currency rates, first-half billings rose 2%, and there was a “modest improvement” in operating cash flow and free cash flow against the comparative period. Last year, the firm did exceptionally well, so the directors described the comparator period as “tough.”
Chief executive Kris Hagerman explained in the report that Sophos is making “solid progress” with its strategy of delivering “advanced and highly effective” cybersecurity solutions to IT professionals at organisations of all sizes. The firm saw ongoing growth in Sophos Central, its strategic cloud management platform, which now has over 77,000 customers. The firm is also “well on track” to release two significant upgrades to its flagship products, Intercept X with EDR, and XG Firewall v17.5, which aim to deliver synchronised security. The move should position Sophos well “in the market for next-generation security solutions, for H2 and beyond.”
Well placed for future growth
The outlook is positive. Sophos thinks it is “well positioned” for future growth. There is a “strong” innovation pipeline and the firm is making a “significant” investment in its strategic Sophos Central cloud platform. There should be a “modest” improvement in constant currency billings growth in the second half of the year compared to the first half. But the company reckons it is on course to deliver a “significant improvement” in the rate of overall constant currency year-on-year billings growth during 2020.
City analysts following the company have pencilled in earnings growth of around 14% for 2020. At today’s share price close to 339p, the forward P/E rating sits at 40 or so, which is an improvement on the rating of 50 back in July. However, I think speculation drove the shares too high before this firm was profitable. I believe there is a robust-looking growth story emerging in the underlying business and soon the valuation looks set to collide with the growth curve to form an attractive entry point – but I don’t think we are quite there yet, so I’ll watch from the sidelines a bit longer
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.