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Barracuda Networks (CUDA)

Healthy quarterly results are boosting the visibility of this cloud computing company.

Buy: Barracuda Networks (CUDA)
from New Technology Superstars

Barracuda Networks (CUDA) is an already-profitable cloud-based provider of network performance, security and storage solutions to corporate IT departments. The company has a special focus on the smaller end of the business market...

Healthy quarterly results are boosting the visibility of this cloud computing company.

Buy: Barracuda Networks (CUDA)

from New Technology Superstars

Barracuda Networks (CUDA) is an already-profitable cloud-based provider of network performance, security and storage solutions to corporate IT departments. The company has a special focus on the smaller end of the business market by offering low upfront costs via a subscription revenue model. Not only does CUDA accelerate network access, but it secures and protects it too, with minimal upfront investment.

The company recently reported a record fiscal first quarter with billings up 17% over last year, to $88 million. Adjusted operating earnings increased 61% to more than $19 million. And free cash flow—the one measure of income that is least susceptible to accounting trickery—is on the rise as well, up 28% to $42 million.

Forward guidance was positive as well, with management estimates above analyst expectations.

For the full year, analysts are looking for the company to generate earnings of 16 cents a share, a 60% increase over the previous fiscal year. Next year, earnings are expected to grow a further 56% to 25 cents a share.

By focusing on capital-light cloud-based offerings, CUDA enjoys a broad customer base and a relatively steady revenue stream thanks to subscription-based billing. The subscriber base has been averaging a 15% annualized growth rate since 2011, as the company’s subscriber renewal rate increased to 97% last year.

The security market, defined by the company as web access, email, intrusion protection, firewall, and routing equipment is an opportunity worth north of $16 billion. The storage market, including disk-based, archiving software, purpose-built build backup network equipment, and data protection software and hardware, is a market worth at least $18 billion in sales.

Analysts at BMO Capital Markets raised their price target on the stock. They highlighted the combination of new customer growth and the opportunity for cross selling products (less than 15% of its subscriber base are using more than one Barracuda product) as justifications for their expectation of accelerating revenue and free cash flow.

In late June, analysts at Topeka Capital Markets initiated coverage on CUDA with a buy rating. They believe the stock is an attractive play on the IT storage and security requirements of small- and mid-sized businesses underserved by larger players. So much so that they believe the fundamentals justify a premium valuation relative to peers.

Certainly, CUDA shares are not super-cheap after rallying 28% off of their low of $23.53 set back in May, and they are up materially over the $18 IPO price. But shares are trading well below high of $44.40 set in earlier in the year. The price-to-sales multiple is 6.5x, which is high but not crazy.

For a fast grower, CUDA actually enjoys a stronger balance sheet than many peers, with a current assets-to-liabilities ratio of 1.15. It gets even better when you consider that most of CUDA’s liabilities are deferred revenue from customers paying in advance—not debt that must be paid back in cash. The company barely has any long-term borrowing to speak of at all.

I realize the recommended entry level is nearly $3 from the current price, but if we get some more rockiness this summer there should be an opportunity to fill at an advantageous level. If not, I will raise the limit price along the way to make sure we get a chance to enter.

The three-year price target is $62.25.

Jon Markman, New Technology Superstars, published by Money and Markets, a Division of Weiss Research, Inc., www.moneyandmarkets.com/services/trading-services/new-technology-superstars, issues@e.moneyandmarkets.com; 1-800-291-8545, July 18, 2014