Barracuda Networks (CUDA) is one of the most shorted stocks on the planet. With over 150% of the float shorted, there is already a high degree of pessimism. How reasonable is this pessimism and are there reasons to believe the share price will being to deteriorate?
The business
CUDA was founded in 2003 and subsequently IPO’d in 2013. Headquartered in Silicon Valley, they operate 15 global offices employing over 1,300 people. The company already has roughly 150,000 customers in over 100 countries.
Its services provide cloud-connected solutions that help its customers address security threats, improve network performance and protect and store their data. CUDA operates in a number of established, multi-billion dollar segments across the security and storage markets that CUDA estimates are approximately $30 billion large, based on market data from established third-party market research firms.
CUDA operates under two primary umbrellas: Security and Storage.
While the specific technology can get fairly advanced quickly, here is a brief breakdown:
Security: CUDA defines its security market as the web access management, secure email gateway, secure web gateway, intrusion prevention systems equipment, secure socket layer VPN equipment, VPN/firewall equipment and application delivery controllers segments.
Storage: CUDA defines its storage market as the archival disk-based storage, archiving software, purpose-built backup appliances and data protection software and hardware segments.
Unlike larger peers, Barracuda has carved out a niche of servicing small-to-mid-sized businesses. These smaller customers have different needs than larger corporations that work towards CUDA’s favor in terms of limiting competition, but also hurt them. For instance, one of their customers biggest security concerns is budgetary, putting pressure on CUDA pricing power.
Weak pricing power has limited CUDA from boosting profitability levels off rising revenues. Despite huge sales growth, the company is still posting negative net income, with both operating and net margins spending most years below zero.
Competition
Main competitors in these markets fall into two categories:
Independent Providers: Blue Coat Systems, Check Point Software (CHKP), CommVault Systems (CVLT), EMC (EMC), F5 Networks, Fortinet (FTNT), Imperva (IMPV), Juniper Networks (JNPR), Palo Alto Networks (PANW), and Symantec (SYMC).
Diversified IT Suppliers: Cisco Systems (CSCO), Dell (DELL), Hewlett-Packard (HPQ), Intel (INTC) and International Business Machines (IBM). These conglomerates have acquired large security specialist vendors in recent years that have storage solutions. With a greater access to capital, these firms have both the technical and financial resources to bring competitive solutions to the market.
Management
William Jenkins
President & CEO
William Jenkins, a 16-year IT industry veteran, has served as president, chief executive officer and board member of Barracuda since November 2012. Previously, he served as president of EMC’s Backup Recovery Systems (BRS) Division. Jenkins joined EMC in 1998 and held a wide range of EMC senior leadership roles before becoming president of the BRS Division, including serving as chief of staff for the division, where he led the highly successful post-merger integration of Data Domain as the foundation for the newly formed division.
Zachary Levow
Co-founder, executive vice president and CTO
Zachary Levow has served on Barracuda’s board since inception of the company. Levow leads the innovation and development of Barracuda’s security and storage solutions.
Michael Perone
Co-founder, executive vice president and CMO
Michael Perone is responsible for worldwide communications and marketing strategies, including corporate brand management and identity. He has more than 25 years of experience in the high-tech industry and was a pioneer in delivering free Internet access to users worldwide.
Insiders still own a respectable share of the company at 17% total:
There has been a rash of insider selling in May however:
Valuation
There still looks to be a fairly high amount of growth expectations for the stock as the company leverages its subscription based model. EPS this year is for $0.39 a share with average estimates expecting 22.5% annual EPS growth over the next five years.
Simply putting this into GuruFocus’ DCF Tool shows us that even with these assumptions, the stock is significantly overvalued.
At this year’s EPS estimate, CUDA would need to growth EPS by over 36% annually for the next ten years for shares to be attractive. This would be quite a feat for a company that has struggled with profitability in its short history of existence.
Conclusion
While the shares are already significantly shorted, possibly making it difficult to create a true short position, you should definitely not be long this stock. While the company may survive and continue to grow profits, the pace at which it would need to do this to justify the current share price would be wildly improbable.
For more ideas like this one, check out GuruFocus’ High Short Interest Screen or the rest of R. Vanzo’s Articles.
