Gen Digital Inc (GEN, Financial) experienced a notable gain of 7.95% in its stock value, with an Earnings Per Share (EPS) of 2.08. But is this a sign of a potential value trap? This analysis will delve into the company's valuation, urging investors to think twice before making a decision.
An Overview of Gen Digital Inc (GEN, Financial)
Gen Digital is a cybersecurity pioneer, offering security, identity protection, and privacy solutions to individual consumers. With renowned brands such as Norton, Avast, and LifeLock, the firm has consistently maintained its position in providing some of the most recognized consumer-focused security and identity-protection products.
Despite a recent stock price of $20.1, the intrinsic value of Gen Digital (GEN, Financial), as estimated by the GF Value, stands at $29.48. This comparison between the stock price and the GF Value sets the stage for a deeper exploration of the company's valuation.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from our unique method. The GF Value Line, available on our summary page, provides an overview of the fair value at which the stock should ideally be traded. This valuation is based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
According to the GuruFocus Value calculation, Gen Digital (GEN, Financial) appears to be a potential value trap. The current market cap of Gen Digital stands at $12.9 billion. Therefore, considering its current price of $20.1 per share, Gen Digital stock gives every indication of being a potential value trap.
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Assessing Gen Digital's Financial Strength
Investing in companies with low financial strength could lead to permanent capital loss. Therefore, a careful review of a company's financial strength is crucial before deciding to buy shares. Gen Digital's cash-to-debt ratio of 0.08 ranks worse than 93.84% of companies in the Software industry. Based on this, GuruFocus ranks Gen Digital's financial strength as 3 out of 10, indicating a poor balance sheet.
Profitability and Growth of Gen Digital
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. Gen Digital has been profitable 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $3.6 billion and Earnings Per Share (EPS) of $2.08. Its operating margin is 38.83%, which ranks better than 97.61% of companies in the Software industry. Overall, the profitability of Gen Digital is ranked 7 out of 10, indicating fair profitability.
Growth is one of the most crucial factors in the valuation of a company. Gen Digital's 3-year average revenue growth rate is better than 58.3% of companies in the Software industry. However, Gen Digital's 3-year average EBITDA growth rate is 4.7%, which ranks worse than 58.55% of companies in the Software industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) is another way to evaluate its profitability. For the past 12 months, Gen Digital's ROIC is 17.27, and its cost of capital is 7.58.
Signs of a Potential Value Trap
Despite signs of potential undervaluation, there are some risks associated with Gen Digital. The Beneish M-Score for Gen Digital stands at -1.52, surpassing the threshold of -1.78, which raises concerns about potential earnings manipulation. To learn more about the Beneish M-Score and its implications, please click here.
Moreover, the Altman Z-score for Gen Digital stands at 0.81, placing the company's financial health in the distress zone and signaling an increased bankruptcy risk. For more on the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
In summary, the stock of Gen Digital Inc (GEN, Financial) gives every indication of being a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 58.55% of companies in the Software industry. To learn more about Gen Digital stock, you can check out its 30-Year Financials here.
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