Cutting Symantec's Fair Value
Management couldn't address the internal audit during its call yesterday and didn't adequately allay concerns around the business.
After reassessing our view on Symantec Corp, (SYMC) we are lowering our fair value estimate to $21 per share from $26 and maintaining the firm’s no-moat rating. Symantec held a call on Monday May 14 as a follow up to a dismal fourth-quarter earnings on Thursday May 10, in which the company announced the commencement of an audit by the internal board of directors due to a complaint raised by a former employee. In our note following Symantec’s fourth-quarter earnings, we had believed that shares were already getting overbaked as they approached $30 per share, well above our $26 fair value at the time. On the call, management provided 2020 guidance, but we are skeptical of the firm’s ability to accelerate growth in the enterprise segment in 2020, after a middling 2019. We have therefore readjusted our long-term assumptions around the mix of enterprise to consumer segment revenue, resulting in our $21 per share fair value estimate. Management could not address the audit, but did not adequately allay concerns around the business.
Symantec’s tepid fourth-quarter guidance was already closer to what we were modeling in our forecast period, but we’ve lowered future growth beyond fiscal 2020. We believe Symantec operates in an industry where trust is paramount above everything else. A consumer trusts Symantec to protect their computer from Malware with their Norton product or LifeLock to protect them from identity theft and fraud. Enterprises trust Symantec to defend their endpoints or cloud applications. In reporting an internal audit, a potential delay in the filing of the firm’s 10-K, and in failing to quell concerns regarding the potential severity of the issues raised, Symantec has, in many ways, violated that trust. If the firm possessed customer switching costs, Symantec’s crisis could make it an attractive opportunity, but if customers do not feel comfortable with Symantec, they will choose a competing product, marring the firm’s growth and compressing margins.
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William Fitzsimmons does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.