Gen Digital Was Overlooked This Year, Will Things Change in 2023?

Perhaps this is the first time you’ve heard of Gen Digital (GEN), formerly known as NortonLifeLock (and before that, Symantec). In a year when tech stocks have been hammered, this cybersecurity expert is down 17%, compared to a 19% drop for the S&P 500 and a roughly 32% drop for the Nasdaq Composite.

Despite its relative outperformance, Gen Digital is not a fast-growing company. However, it has some big plans for increasing profits over the next few years, which has some investors enthusiastic. Is the stock a good investment in 2023?

After merging with sister cybersecurity company Avast, Gen Digital (an abbreviation for Generation Digital, a reflection of the company’s objective to keep consumers throughout the world secure in what has become a very digital environment) has completed its redesign. Until recently, the company was known as Symantec. Broadcom (AVGO), a semiconductor designer and corporate software company, purchased Symantec’s enterprise security segment, leaving the remaining consumer security brands as NortonLifeLock. Gen Digital is now a pioneer in individual and small company security software and has partnered with Avast’s consumer software.

Norton, Avast, LifeLock, Avira, AVG, and CCleaner are among the brands under Gen Digital’s umbrella. The company has offices in both Arizona and the Czech Republic.

In Gen Digital’s Q2 fiscal 2023 earnings release, the merger with Avast, which was previously a publicly traded firm in Europe, was disclosed to cost $6.55 billion net of cash on Avast’s balance sheet (for the three months ended September 2022).

How is the stock outperforming the market?

Gen Digital is not the fastest-growing cybersecurity firm. When eliminating the effects of currency exchange rates, sales climbed 12% year over year in the last quarter (which includes a few weeks at the end of the year with a contribution from Avast). Avast accounted for 7 percentage points of that rise, so revenue would have increased by 5% in constant currency if the merger had not occurred.

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Accounting for the historic run-up in the US dollar, actual reported revenue for the second quarter of fiscal 2023 was $748 million, an 8% increase over the previous year. The adjusted operating profit increased by 7% to $388 million, and the adjusted profits per share increased by 5% to $0.45. Slower growth rates are consistent with the consumer cybersecurity market. The major growth these days is in big enterprise cloud security.

Nonetheless, although this business keeps consumer data safe from unscrupulous actors, the market is bullish on Gen Digital’s potential for profitability. During the most recent earnings call, management stated that the NortonLifeLock and Avast tech systems had been integrated, resulting in annualized savings of more than $300 million. Marketing initiatives and other brand linkages are also being developed, giving the company’s C-suite confidence that it can save an additional $200 million over the next two years.

At the time of writing, Gen Digital shares were trading for just under 22 times trailing-12-month earnings per share, or just under 17 times trailing-12-month free cash flow. A boost from integrating revenues and profits from two security software companies will be in effect until the autumn of the calendar year 2023, thus the stock could become fairly inexpensive throughout that time if the share price remains constant.

Is Gen Digital a good investment?

This corporation believes in stable sales growth but rapid profit growth. Gen Digital generated $0.90 in adjusted earnings per share for the first half of 2022. (EPS). The projection for fiscal Q3 2023 is for another $0.45 in adjusted EPS, so let’s suppose Gen Digital ends the year with $1.80 in adjusted EPS.

Management expects to generate $3 in annualized adjusted EPS (or $0.75 each quarter) by the end of fiscal 2025 (midyear calendar 2025). That is 67% greater adjusted EPS on a quarterly basis than it is now posting.

This means that Gen Digital’s average adjusted earnings-per-share growth in fiscal 2024 and fiscal 2025 will be over 30%. If the company can pull it off and settle into a mid-single-digit percentage growth rate after that, it could be a good time to buy a cybersecurity stock.

However, there are a few hazards to consider.

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As previously stated, consumer security software is not a growing business. Gen Digital intends to reinvest some of its savings in the development of new products, notably those for small enterprises. Despite the fact that this market is slow, there is plenty of competition in this arena. Profitable expansion is far from certain, particularly once the synergies from the merger with Avast are achieved.

Gen Digital’s balance sheet is also a little sloppy, with $1.1 billion in cash and short-term investments and slightly over $10 billion in total debt. However, Gen Digital has enough cash in hand to complete its goals. In the most recent quarter, shareholders received a $0.125-per-share dividend (for a current annualized yield of 2.3%), and $73 million in stock was repurchased.

I don’t believe Gen Digital will be a major market-beating investment over the next few years. If the global economy recovers from what is predicted to be a minor recession in 2023, I believe faster-growing and more profitable cybersecurity stocks will skyrocket.

However, if you’re looking for more protective cybersecurity investment, Gen Digital could be a cheap company with a clear route to unlocking a lot more profit in the next two to three years. Keep an eye out for this one.

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