Strong Earnings Could Drive NortonLifeLock Stock To Pre-Covid Highs

Despite a more than 25% rise from its low in March 2020, at the current price of $21 per share, we believe NortonLifeLock stock (NASDAQ: NLOK) has further upside potential. NLOK stock has increased from $16 to $21 off the recent bottom, much less than the S&P which increased by around 70% from its lows. Further, the stock is still at the same level as it was before the pandemic. We believe that NLOK stock could regain its 2019 high of around $25, rising almost 20% from its current level, driven by expectations of strong demand and strong Q3 2021 results despite the pandemic. Our dashboard What Factors Drove 10% Change In NortonLifeLock Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came despite a 3% drop in revenue from $2.56 billion in 2018 to $2.49 billion in 2020 (NLOK’s fiscal year ends in April). Combined with a roughly unchanged outstanding share count, NLOK’s revenue-per-share (RPS) dropped 2.5% from 2018 to 2020.

NLOK’s P/S (price-to-sales) multiple rose from 4.5x in 2018 to 6.6x by 2019 end, but has since dropped to 5x. We believe that the company’s P/S ratio has the potential to rise in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 have seen a surge in online activity, due to a rise in new blogs and websites and has also led to a lot of businesses shifting online. This has driven up demand for online security and antivirus software, thus driving up demand for NortonLifeLock’s security software products. This is evident from NLOK’s Q3 2021 earnings, where revenue came in at $639 million, up from $618 million for the same period last year. Further, a drop in cost of revenue and operating expenses, saw operating income rise more than quadruple, from $62 million to $280 million. However, net income dropped 50% from $353 million to $$173 million, but a closer look reveals that it was due to $400 million in other income in Q3 2020. The 4x rise in operating income demonstrates the efficiency of the management in riding out the pandemic, which has, in fact, helped the company’s revenues rather than hampering them.

We expect demand for NLOK’s products to stay strong in the medium term, driving up revenues, and if the company manages to continue keeping operating expenses in check, profitability could jump even further. We expect this to drive up the company’s P/S multiple, and believe that NLOK’s stock can rise almost 20% from current levels, to its 2019 high of $25.

While NortonLifeLock stock does seem attractive, 2020 has created many pricing discontinuities which can offer further attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams