Gen Digital: Stable Results and Stronger Forecasts
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Gen Digital’s earnings report once again delivered results that exceeded expectations, while management raised its full-year forecast for the fourth consecutive quarter, further reinforcing confidence in the company’s growth trajectory. Given the stock’s low valuation, it is particularly encouraging that the company continues to achieve stable growth even after the base effect of the MoneyLion acquisition has run its course. In addition, products based on artificial intelligence are showing increasing user activity, suggesting that, in the long term, AI supports rather than threatens the company’s business model, although intensifying competition in the cybersecurity market continues to require ongoing development expenditures.
Gen Digital shares remain on our Equity Top pick List.
Quarterly report
Gen Digital’s stock has had a difficult start to the year, but since May, as sentiment toward the cybersecurity sector has improved, the stock has outperformed the market. The company’s subscriber base exceeded 80 million, representing a 6.6% increase year-over-year. This marks the 11th consecutive quarter of growth in the subscriber base. Revenue rose 11% to $1.34 billion, exceeding market expectations of $1.31 billion. The impact of the MoneyLion acquisition, which was completed in mid-April of last year, was already reflected in the base-period revenue, so the transaction no longer affected year-over-year performance.
The growth in revenue was driven primarily by a 24% increase in the Trust-Based business segment — which encompasses services built on digital trust and financial well-being — and includes MoneyLion’s results. In contrast, revenue from the Cyber Safety platform, which brings together traditional cybersecurity products, rose by only 4%, falling short of the company’s average growth rate. The company faces increasingly intense competition and growing challenges in the cybersecurity market, which requires continuous investment and development — particularly in the field of artificial intelligence — to maintain its competitive advantage in the consumer cybersecurity services market.
The operating margin remained at 50%, which is unchanged year-over-year. Earnings per share rose 11% compared to the same period last year, and the result of 71 cents slightly exceeded analysts’ expectations of 69 cents. Looking ahead, management raised its forecast for the current fiscal year: revenue is expected to reach $5.43 billion, up from the previously projected $5.38 billion, representing approximately 10% year-over-year growth. Earnings per share could reach $2.92, representing growth of nearly 16%, up from the previously expected 14%. The growth outlook is particularly favorable given the stock’s low valuation, as reflected by its forward P/E ratio of 9.
Overall, the company continues to post strong results, and growth metrics following the acquisition are also outperforming expectations. Management is confident in the sustainability of the growth trajectory, having raised its forecasts for the fourth consecutive quarter, which points to a high level of execution and the continuation of favorable business trends. The company has made significant progress in the development of artificial intelligence-driven products. The number of daily active users of Norton Neo has doubled, while the Sage AI security agent now protects 25 million customers. All of this points to a favorable long-term outlook and may reinforce the investor view that artificial intelligence represents an opportunity rather than a risk for the cybersecurity industry.
Valuation
In the technology sector—and specifically among software companies—Gen’s valuation metrics remain relatively depressed (PE: around 9 vs. sector average: 28; EV/EBITDA: 9 vs. sector average: 19). Although expected growth is also somewhat lower—16% and 10% (at the EPS and EBITDA levels)—than the sector average, even these figures do not necessarily justify such a significant pricing discount. Our metric-based fair value estimate is $32, which still implies upside potential relative to the current share price.
Investment story
- The company provides protection against cyber threats (viruses, malware, ransomware, phishing, hacker attacks) to PCs, tablets, and smartphones through globally recognized brands such as Norton, Avast, Avira, and LifeLock. Norton LifeLock acquired its rival Avast in 2022 and is now the market leader in its field under a new name, Gen Digital.
- The company has a customer base of 500 million, mostly residential, of which 81 million are monthly/annual subscribers. The company is also developing in the field of machine learning and AI, has its own patents, and already offers solutions based on these to its customers.
- The company's free service user base (>400 million) is one potential source of new subscription growth, but customer retention and increased sales through partners could also contribute to the planned average annual revenue growth of around 5% over the next three years.
- The acquisition of MoneyLion was completed last year, representing a cash outflow of $1 billion (at what appears to be fair pricing levels: 9-11X EBITDA multiple) and, subject to certain conditions, could even have a dilutive effect (with the issuance of 1.5% new Gen shares). The company operates an app offering retail financial products and has 20 million users, with little overlap with GEN's customer base. However, the emergence and spread of AI agents could pose a serious challenge to the platform's business model, which could be a significant risk that could also cloud its growth prospects.
- However, cross-selling opportunities are visible for the time being, and with annual revenues of USD 546 million, the new company could make a positive contribution (14% of that amount) from day one, and it is also profitable in terms of earnings. With the closing of the transaction, Gen began to return to its own share purchases at the end of last year (USD 300 million, 2% of capitalization), as we had expected, which had been temporarily suspended due to the acquisition.
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