What a brutal six months it’s been for Tenable. The stock has dropped 24.8% and now trades at $31.52, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Tenable, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Tenable Not Exciting?
Even though the stock has become cheaper, we're swiping left on Tenable for now. Here are three reasons why there are better opportunities than TENB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Tenable grew its sales at a 16.9% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Tenable’s revenue to rise by 7.5%, a deceleration versus its 16.9% annualized growth for the past three years. This projection is underwhelming and implies its products and services will face some demand challenges.
3. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Tenable’s expensive cost structure has contributed to an average operating margin of negative 1.7% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Tenable reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.
Final Judgment
Tenable isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 3.8× forward price-to-sales (or $31.52 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Tenable
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