NortonLifeLock Stock To Struggle Despite Demand Surge In Internet Security?

NortonLifeLock stock (NASDAQ: NLOK) is down 18% since the beginning of this year, but at the current price of around $21 per share, we believe that NLOK stock has around 15% potential downside.

Why is that? Our belief stems from the fact that NLOK stock is still up more than 25% from the low seen in March. Further, after posting weak Q1 2021 numbers, and having sold off its enterprise security business, it’s clear that NLOK did not benefit as much from the pandemic, as other internet security companies. Our dashboard What Factors Drove 10% Change In NortonLifeLock Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

NLOK stock’s rise since late 2018 came despite a 3% drop in revenues, which translated into a 3% drop in revenue per share, as the outstanding share count was roughly unchanged.

Norton’s P/S (price-to-sales) ratio rose from 4.5x in 2018 to 6.6x in 2019, due to higher investor expectations surrounding a surge in the need for internet security. However, the P/S multiple has since dropped to around 5x currently as Norton only operates in the consumer security segment, where demand growth is negligible compared to enterprise security. Further, given Norton’s poor Q1 ’21 numbers, there is further possible downside risk for Norton’s multiple.

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

The global spread of Coronavirus, and the resulting lock downs and quarantine means that a lot of businesses have moved online, and people are also working from home. Due to this, businesses have placed more emphasis on internet security, and the need for firewalls and antiviruses has never been higher. However, Norton sold off its enterprise security business in 2019 and now operates exclusively in the consumer security segment, where demand is significantly lower than enterprise security. This is evident from Norton’s Q1 ’21 results (Norton’s fiscal year ends in May), where revenue, in fact, dropped YoY from $650 million to $614 million. Operating income came in lower at $120 million compared to $140 million for the same period last year. However, EPS came in higher at $0.20 from $0.04 in Q1 ’20, but this is misleading as the growth was solely due to an income tax benefit of $50 million compared to a tax expense of $54 million last year.

We expect Norton’s business to struggle without the enterprise security leg and if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 5x to around 4.5x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $18, a downside of almost 15% from the current price of $21.

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