It’s amazing how quickly investor sentiment can change. The week before last, cybersecurity specialist Avast (LSE: AVST) was one of the best-performing stocks in the FTSE 250 for the year. In the space of just a few weeks, its share price had shot up from around 450p to 550p. And brokers were expecting it to keep rising too, with analysts at Jefferies slapping a price target of 627p on it on 21 January.
Last week, however, the FTSE 250 stock came crashing back down to earth. Between Monday and Thursday, it fell from around 550p to just under 400p – a decline of nearly 30%.
So, why did Avast shares experience such a dramatic shift in sentiment? Let’s take a look at what happened.
Data privacy issues
The reason Avast shares fell sharply is that a report emerged mid-week claiming that the cybersecurity company had been selling highly sensitive browsing history data of its users.
According to an investigation by Motherboard and PCMag, Avast was tracking data – including Google searches, website visits, and GPS coordinates – through its free antivirus programmes, and this was being sold (after being de-identified) to the likes of Google, Yelp, and Microsoft, through another subsidiary named Jumpshot.
Avast claims that it had user consent to collect data. However, users were apparently not aware that their data was being sold on. Another issue is that the investigation found that it was fairly easy to reveal the identities of those whose data had been sold on.
In response to the report, Avast came out on Wednesday and said that it was reviewing how trends analytics service Jumpshot aligns with its values as a cybersecurity and privacy company. Then on Thursday, the group advised that it had decided to terminate the provision of data to Jumpshot with immediate effect.
CEO Ondrej Vlcek said: “Avast has always been committed to doing the right thing for its users and customers, and this is the overarching principle that has guided our decisions in response to recent developments. While we have always acted with integrity, our respect for people’s privacy concerns must take precedence over everything else.”
The group reinforced its view that it had always acted in full accordance with privacy regulations and had worked to implement best practices.
It said that it expects to incur a one-time exceptional cash cost of between $15m to $25m in the current financial year to cover closure costs, an asset write-down and employee restructuring.
Avast also took the opportunity to provide a brief trading update. For the year ending 31 December 2019, it expects to report:
Organic billings growth of 10.2%
Organic revenue growth of 9.1%
Adjusted EBITDA growth of 7.9%
Looking ahead, it said that it expects to deliver mid-single-digit organic revenue growth in FY2020.
Avast has certainly made the right move in terminating the provision of data to Jumpshot, in my view, as data privacy is a big issue these days. Looking at the company’s share price, it seems the market agrees with me, as the stock has rebounded over 10% since Friday.
Given that the group is adamant that it always acted in full accordance with privacy regulations, I think the recent pullback may have created a buying opportunity. The forward-looking P/E ratio has fallen to about 17.7, which is an attractive valuation in my opinion given the company’s growth potential.
Edward Sheldon owns shares in Alphabet and Microsoft. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares) and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.