Is NortonLifeLock Stock’s Rally Over?

After a 38% rise since its low in March, at the current price of around $23 per share we believe NortonLifeLock stock (NASDAQ: NLOK) has reached its near term potential. The stock has crossed the level it was at before the drop in March, but in reality, demand and revenues will likely be affected this year. Norton stock has already rallied from $16.50 to $23 off the recent bottom compared to the S&P which moved 54%.

Further, NLOK stock is up about 25% from levels seen at the end of 2018, over 1.5 years ago. This rise came despite a 3% decrease in NLOK revenues from 2018 to 2020 (NLOK’s fiscal year ends in April), which combined with a roughly unchanged outstanding share count, led to a 2.5% drop in revenue per share (RPS).

Further, its P/S multiple saw an increase from 4.4x in 2018 to 6.5x in 2019, but has dropped again to around 5.7x, as the company sold off its lucrative enterprise security business and now focuses exclusively on consumer security. Additionally, we believe the stock is unlikely to see significant upside after the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 24% Change in NortonLifeLock Stock between 2018 and now? has the underlying numbers.

So what’s the likely trigger and timing for this downside?

While the global spread of Coronavirus has boosted demand for internet security, the resulting lockdowns in many countries have primarily led to a rise in demand for enterprise security software (the business that NLOK sold in 2019) and not so much for consumer security as the crisis has not affected the way in which individuals browse the internet and their online security needs. This seems evident from NLOK’s Q1 2021 earnings, where revenue came in at $614 million vs $650 million for the same period last year. We expect this trend to continue through 2021, with an expected Y-o-Y drop for Q2 and Q3, as well.

Regardless, if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from the current level of 5.7x to around 5x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to around $20.

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