Avast – an underrated tech stock #AVST

Avast – an underrated tech stock #AVST

Recently the cybersecurity company Avast has been creeping onto my radar. Though I typically focus on higher-yielding shares, I think this growth-focused company has a lot going for it.

Avast has an interesting business model for a cybersecurity company – offering a freemium service to consumers rather than to business like many of its rivals. Think of it a bit like free-to-download apps that offer in-game purchases. It makes money by upgrading these consumers and then cross-selling more services such as additional security, privacy, and device utility products. The company targets consumers, rather than enterprises, and has been hugely successful in reaching end-users as it has over 435 million active monthly users of its products worldwide.

Looking at its latest annual report, one of the things I like to see as an investor is management with “skin in the game”. To me base salaries look to be under control with much of the management team’s income tied to long-term incentive plans.

The latest results

The 2019 half year results showed that Avast was able to improve its already impressive EBITDA margin. It went from 55.1% to 55.4% while operating profit increased from $214.4 to $225.7m. Customer numbers also eked up and there will be a first ever interim dividend of 4.4 cents. Overall the yield, like with most technology stocks, is on the low side at around 1.7% but the focus with Avast is on growth.

Notable financial points from the results were:

  • Billings excluding FX up 12.5% (up 9.2% at actual rates)
  • Revenue excluding FX up 9.2% (up 8.3% at actual rates)
  • Unlevered Free Cash Flow $230m, +20.0%, supporting further deleveraging
  • Adjusted Net Income $148.2m, up +13.8%, adjusted fully diluted EPS +7.2% at $0.15 per share

The results from consumer desktop division were better, while consumer mobile fared less well. The former saw billings up 14.3% and revenue up 10.5% – when the impact of FX is stripped out. Avast expects that revenue growth excluding FX will be ahead of the guidance provided at the 2018 year-end and it now expects low double-digit growth in FY19.

The decline in the mobile carrier business was attributed primarily to the carry-over impact of the Sprint account loss. Recovery in the mobile part of the business would be a substantial boost for the whole group, but given the group identified that “cycles continue to lengthen” this should not be expected imminently.

Comparison against Sophos

When compared to one of its main rivals Sophos – which has a far higher P/E – Avast looks to be offering good value. For example, results from Sophos showed that for FY19 its cash EBITDA was down, as was unlevered free cash flow which was down 11.3%. As well as being more expensive, Sophos also has a lower yield. On this basis, I think Avast looks far more investable.

Deal with Ascential

The information group, Ascential, confirmed it has agreed to acquire an initial 35% stake in Avast’s marketing analytics subsidiary, Jumpshot. Ascential, which is paying £48.7m (US$60.8m) for the stake, has the option to take a majority ownership in Jumpshot further down the line.

Avast describes the deal as an opportunity to unlock shareholder value now and in the future. As part of the deal, there will be opportunities for new joint products to be developed over 24 months and Avast says that it is a “long term partnership, leveraging Ascential’s global distribution footprint and complementary datasets.”

The deal with Ascential I think provides reassurance about the quality of Avast’s products and provides cash for the group to invest in further product launches and innovation. Something the company is committed to as 50% of its workforce is in research and development.

My view

While both Sophos and Avast operate in the same industry it is the latter that looks far better positioned for sustained growth. Avast has far better profitability, the discipline to squeeze out further margin gains, which are already above 50% and has ample scope to increase the dividend over time.

As a potential investor in Avast I am excited to see the combination of sustained profits growth alongside the possibility down the line as the business matures for the dividend to increase substantially.

To me Avast looks to be massively undervalued in a world where technology companies are often trading at a massive premium to their underlying financials. That is surprising to me and I think eventually the market will cotton on to the quality of Avast as an investment. It could well be the most underrated tech stock – at least that I’ve seen.

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  • comment-avatar

    What’s put me off is the level of debt which comes with Avast. I.e. net gearing above 113%. Any thoughts ?

    • comment-avatar

      I’d expect this to come down a lot in the coming years due to a combination of lessening R&D expenditure, more deals like the one seen with Ascential, a growing cybersecurity marketplace and the opportunities for growth. For example, revenue increased by 23.8% between 2017 and 2018. While gearing may seem high now that’s something that comes with huge R&D spending (the Group spent US$ $ 65.7m on R&D for the year ended 2018)and investing for growth. One thing I don’t know, but that investors should seriously always consider is, how gearing compares to rivals but I suspect it’d be similar. All these companies are competing ferociously in a crowded marketplace.

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