CyberArk Stock: Still A Buy, ARR Growth Accelerating In 2024 (NASDAQ:CYBR)

We continue to be buy-rated on CyberArk (NASDAQ:CYBR). 3Q23 results and outlook confirm our belief that CYBR is better positioned to outperform as the transition to the SaaS business model completes; this quarter, subscription bookings made up 97% of license bookings in the quarter, higher than 87% in the year-ago quarter. Our focus for CYBR is its annual recurring revenue or ARR growth to track both the cybersecurity demand environment and traction for CYBR offerings; in our opinion, ARR is a key performance metric for SaaS companies to measure success and identify potential risks, and hence, we use it for CYBR as the company is soon to wrap up its SaaS business model transition. Our bullish sentiment on CYBR is largely driven by the company’s steadily increasing ARR growth rate Y/Y, which we believe indicates a solid product-market fit into 2024.

The company reported 38% Y/Y ARR growth this quarter to $705M, of which 72% accounted for the subscription portion and grew 68% Y/Y. Next quarter, we think CYBR will be better positioned to grow ARR as it’s estimated to have a strong base of recurring revenues, with 91% of quarterly revenue being recurring in nature in 3Q23. Management now guides for revenue in the range of $206.5-211.5M in 4Q23, representing a 22-25% Y/Y growth; we believe CYBR will be able to beat consensus estimates for the quarter at $209.33M comfortably. We expect a similar beat in 4Q23 as we did this quarter, where management surpassed guidance and consensus, reporting 25% Y/Y growth to $191.2M.

The following outlines CYBR’s recurring revenue in 3Q23.

Additionally, we see room for higher Y/Y revenue growth in FY24 guidance expected to be announced next quarter; for FY23, management estimates revenue to be in the range of $735.3M to $740.3M, representing a 24-25% Y/Y growth in comparison to FY22. Given the expanding threat landscape and increased urgency for identity security solutions, we see FY24 guidance being materially higher. We expect the demand environment to improve in 2024 due to the combined impact of the pandemic-incited shift to remote work and the ongoing digital business transformation that has raised awareness of cybersecurity concerns. Hence, we see more room for FY24 revenue growth to be in the higher double-digit range Y/Y.

We believe CYBR will continue to be among the top cyber names due to its diversified product offerings that allow it to capture demand from both new clients and old clients within its install base. The stock price movement reflects the higher investor confidence in the identity security solution provider over the past two months. Since our buy-rating in early September, the stock has outperformed the S&P 500 by ~24%. Over the past six months, the stock outperforms the S&P 500 by roughly 34% and 25% over the past three months. We see more upside potential in 2024 as IT spending rebounds; Gartner now projects IT spend to rebound 8% Y/Y in 2024. We recommend investors explore entry points into the stock at current levels.

The following outlines our rating history on CYBR.

CYBR is not without risk. The company, along with the broader cybersecurity peer group, is exposed to macro headwinds weighing on enterprise budgets and IT spend. We think the company will be relatively resilient as cybersecurity remains a top priority heading into 2024. We also think that CYBR has the upper hand in its competition against Okta (OKTA) in the identity security market after OKTA suffered the cyber breach earlier this year. We expect customers to prefer CYBR over OKTA in 1H24 and, hence, see more traction on the platform.

CYBR also faced a headwind on revenue growth, which is its perpetual license wind-down process, but we now think this headwind is easing as the company completes its transition to a SaaS business model. We see a more favorable risk-reward profile for the stock heading into 2024.

Valuation

The stock is fairly valued, in our opinion. On a P/E basis, CYBR is trading at 128.5x C2024 EPS $1.71 compared to the peer group average of 112.8x. The stock is trading at 9.6x EV/C2024 Sales versus the peer group average of 9.0x. We think CYBR should be valued on an EV/Sales ratio and view the company as a growth stock. Additionally, we believe the company deserves a higher multiple for its ARR growth and may re-rate to one in 1H24.

The following chart outlines CYBR’s valuation against the peer group.

Word on Wall Street

Wall Street shares our bullish sentiment on the stock; the 31 analysts covering the stock are buy-rated. We see more upside potential in 2024 due to the expected rebound in IT spending next year. The stock is currently priced at $220 with a median sell-side price-target of $190 and a mean of $189 with a downside of 14%. We think the downside is due to the stock’s run-up over the past six months and expect price targets to reset higher in 2024.

The following graph outlines Wall Street’s sentiment on CYBR.

What to do with the stock

We continue to buy-rated on CYBR. We think CYBR will continue to be relatively resilient to macro uncertainty, similar to Palo Alto Networks (PANW) and CrowdStrike (CRWD). We believe ARR will continue to accelerate further as CYBR and see increased incentive for customer spend on cybersecurity as AI is weaponized by attackers and the cyber threat landscape expands; according to Gartner, the worldwide end-user spend on cybersecurity and risk management is estimated to increase 14.3% in 2024 from this year. We recommend investors add to their position opportunistically to ride the upward trend in 2024.