The CEO or Chief Executive Officer is a company’s leader and the individual who is supposed to have the greatest vision and insight into where the company is heading. The CEO’s “right hand” is the Chief Financial Officer (CFO), who feeds the latest financial forecasts to the CEO, while the Chief Revenue Officer (CRO) often gives revenue growth updates and the Chief Operating Officer (COO) informs the CEO of how well operational expansion is going.
Therefore, one data point that investors like to pay attention to when assessing a stock’s future performance potential is whether the CEO and other insiders have been buying shares of their company. In this post, I’m going to break down two stocks in the cybersecurity industry that have been bought by their CEOs recently as this could be a bullish signal; let’s dive in.
1. Akamai
Akamai (AKAM, Financial) is a leading Content Delivery Network (CDN) provider. The company has a distributed footprint of 1,300 networks across 4,100 locations and 130 countries.
The goal of a CDN is to provide the content you need, such as webpages and videos, in a fast and secure manner. A CDN enables this by storing a “cached” version of your content across multiple locations. Say, if you're in New York City and wish to access a website hosted in Australia, it will derive a copy directly from the local New York City data center, reducing latency.
Akamai has a large CDN business (by revenue) and competes with rapidly growing companies such as Cloudflare (NET, Financial) and Fastly (FSLY, Financial). Akamai is also offering cloud infrastructure services after the acquisition of Linode for $900 million in 2022. Linode is a developer-friendly cloud provider which has 11 data centers worldwide and over 1 million customers. The platform basically enables a user to easily “spin up” compute power in order to benefit from the power of cloud computing. Many customers use this for hosting websites or apps or running experiments. Linode is known as a cost-effective platform and also offers storage services such as databases.
Akamai does compete with the major cloud infrastructure providers such as Amazon's (AMZN, Financial) AWS, Microsoft (MSFT, Financial) Azure and Alphabet's (GOOG, Financial)(GOOGL, Financial) Google Cloud, which is a risk. However, the company has carved out a niche offering a “no lock in," easy-to-use platform with cheap and transparent pricing.
Steady financials
Despite the large market opportunity available to it, Akamai’s financials have been fairly steady so far. For the fourth quarter of 2022, the company generated revenue of $928 million, which increased by just 2% year over year, or 6% on a constant currency basis.
A positive is its Security and Compute revenue has been growing rapidly and increased by a rapid 18% year over year to $510 million. I believe this segment has huge potential due to the industry growth forecast for both the cloud and cybersecurity.
According to Fortune estimates, the cybersecurity industry was valued at $155.83 billion in 2022 and is forecast to grow at a rapid 13.4% Compounded Annual Growth Rate (CAGR), reaching a value of $376 billion by 2029.
A notable client in this segment is Booking Holdings' (BKNG, Financial) Booking.com, which utilizes Akamai’s remote work security solution that has become vital since the rise of remote working. In addition, the company has provided a Security Operations Center solution to Lufthansa, Germany’s largest airline.
Akamai is still struggling with profitability, as the company reported a 17% decline in operating income to $177.4 million. A positive is this was mainly driven by a 5% year-over-year increase in R&D expenses to $103 million, which was felt as revenue growth was slow. Overall this result wasn’t terrible and the company actually beat earnings per share forecasts by $0.03 with $0.82.
On its balance sheet, the company has $1.1 billion in cash and short term investments. It does have fairly high total debt of $3.174 billion, but the majority of this ($2.285 billion) is long-term debt and thus manageable.
Insider buying and valuation
Akamai’s co-founder and CEO Thomas Leighton has made a total of 35 transactions in the stock over the past 18 months with a net share purchase of 24,115 shares.
In March and April of 2023, the share price on the days he bought the stock ranged between $72 and $78 per share, which is close to where the stock trades at the time of writing.
Akamai trades at a forward price-earnings ratio of 14 and a price-sales ratio of 3.30, which is ~30% cheaper than its five-year average.
The GF Value chart indicates a fair value of $125 per share and thus the stock is “significantly undervalued” at the time of writing.
2. Varonis Systems
Varonis Systems (VRNS, Financial) is an emerging provider of data security solutions that was ranked as a Forrester Wave Leader in this industry. The big data industry was valued at $163 billion in 2021 and is forecast to grow at an 11% compounded annual growth rate, reaching a value of $275 billion by 2026, according to Markets & Markets estimates.
Securing all of this big data has become a major challenge for organizations and this is a problem Varonis hopes to solve. Its main products include data discovery and classification, compliance management, data access governance and ransomware protection.
Varonis has a range of well-established customers which include Coca-Cola (KO, Financial), the Nasdaq, Nasa and the U.S. Army. The quality of these customers is a testament to the product's high reliability and accuracy in my view.
Transforming financials
Varonis reported strong financial results for the fourth quarter of 2022. The company reported $143 million in revenue, which increased by ~13% year over year and beat analyst forecasts by ~$2 million.
The business is still transitioning towards a full software-as-a-service (SaaS) model, and thus lowwer friction and faster sales growth may be in the outlook for the long term. Management has set a bold annual recurring revenue target of $1 billion over the next five years.
Moving on to profitability, the company reported a loss per share of $0.10 in the fourth quarter, but on the bright side this still beat analyst forecasts by $0.06.
Its operating loss has started to narrow from $17.8 billion in in the fourth quarter of 2021 to "just" $10 billion in the fourth quarter of 2022.
Its balance sheet is strong with $733 million in cash and short term investments compared to $249 million in total debt.
Insider buying and valuation
CEO Yakov Faitelson purchased a total of 26,516 shares of the stock in the fourth quarter of 2022. On the days of his purchases, shares traded between $16 and $21 per share. The CFO, Guy Melamed, also purchased 38,685 shares of the stock in the fourth quarter of 2022.
Varonis trades at a price-sales ratio of 5.7, which is ~36% cheaper than its five-year average.
The GF Value chart indicates a fair value of $56.46 per share and thus the stock is “significantly undervalued” at the time of writing.
Final thoughts
Both Akamai and Varonis are two companies that are transforming their business models and have great potential to expand in growing markets. Akamai has a huge opportunity in the cloud and in cloud cybersecurity, whereas Varonis is poised to become a leading provider of data security. Their CEOs have been buying shares in the past year, which serves as a strong positive signal.
