Small-cap stocks in the Russell 2000 index could deliver strong returns later this year if interest rates fall as expected.
The Russell-2000 The index includes about 2,000 of America’s smallest publicly traded companies. It achieved a strong gain of 10% in July, significantly outperforming the S&P500 Index that traded unchanged throughout the month.
Investors expect the US Federal Reserve to decide on up to three interest rate cuts by the end of 2024. This could benefit small companies, as they tend to rely more heavily on debt to fuel their growth than their large-cap competitors.
However, all major U.S. market indexes – including the Russell 2000 and the S&P 500 – are set for a sell-off in August. This could be an opportunity for long-term investors to buy quality stocks at a discount. Here’s why small-cap cybersecurity companies Durable (TENB 0.89%) is worth considering.
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A leader in vulnerability management
Tenable specializes in vulnerability management, a proactive branch of cybersecurity that involves identifying weaknesses in an organization’s devices, networks and operating systems so they can be remediated before malicious actors exploit them. These tools are critical for modern organizations with a growing digital presence, protecting blind spots that might otherwise have been missed.
Tenable owns Nessus, the industry’s most accurate and widely used vulnerability management tool. It joins a growing portfolio of other Tenable products that include cloud security, identity security and a new tool called ExposureAI.
ExposureAI uses artificial intelligence (AI) to quickly analyze security data and help managers make more informed decisions about their security posture. Tenable says it has the world’s largest archive of exposure data, covering a whopping 1 trillion unique threats and vulnerabilities, so ExposureAI has the potential to be faster and more accurate than competing products.
Tenable’s entire suite of cybersecurity software products – including ExposureAI – is now available on a single platform called Tenable One. With this, Tenable seeks to “platform” customers – that is, to meet all of their vulnerability management needs under one roof. This can lead to more revenue per customer and a much higher lifetime value than if they only use one or two products.
“Platformization” is currently a key topic in the cybersecurity industry, especially among leading companies such as Palo Alto Networks And CrowdStrike as they fight for market dominance.
Tenable continues to make progress on the bottom line
Tenable generated revenue of $221.2 million in its latest second quarter of 2024 (ended June 30), up 13% from the same period last year. It was also well above management’s guidance of $218 million.
Tenable serves over 44,000 enterprise customers, but 1,793 of them spend at least $100,000 per year on the company’s software. That number is up 19% year over year, underscoring how important vulnerability management tools are becoming for larger, complex organizations.
Tenable has historically made losses because it spends heavily on things like marketing (its biggest expense) to attract customers and drive growth. But over the past year, the company has spent more cautiously to improve its bottom line amid a difficult global economic climate.
In the second quarter, Tenable increased its operating expenses by just 11.7% year over year, with marketing expenses increasing by just 3.3%. While the company still posted a net loss of $14.5 million, that was a slight improvement from the net loss of $15.9 million in the year-ago period.
In fact, on a non-GAAP basis (which excludes one-time and non-cash expenses such as restructuring costs and stock-based compensation), Tenable generated profit of $38.1 million, a solid 45% increase over the year-ago quarter.
Why it’s worth buying Tenable shares now
Tenable has a market capitalization of just $4.9 billion, which is why it is listed on the small-cap Russell 2000 index. It is much smaller than leaders in the broader cybersecurity industry such as CrowdStrike and Palo Alto Networks, which are valued at $55 billion and $99 billion, respectively. Both companies are listed on the S&P 500 index.
Tenable’s shares are also significantly cheaper than the other two names on a comparable basis, measured by price-to-sales ratio. Based on the company’s trailing-12-month revenue of $852 million, the stock trades at a price-to-sales ratio of just 5.7. That’s more than 50% cheaper than CrowdStrike and Palo Alto:
PS ratio data from YCharts
Consider that Palo Alto only saw a 15% increase in revenue last quarter, so the company isn’t growing much faster than Tenable — and yet it trades at more than double its price-to-earnings ratio. Palo Alto is a fantastic company, and I don’t think its value needs to fall. In fact, I think Tenable stock deserves a higher price.
Tenable says its target market in the exposure management space of the cybersecurity industry is worth $33 billion. Based on current revenue, the company has barely capitalized on this opportunity, meaning the company still has plenty of room to grow.
The general sell-off in the stock markets could be a good time for investors to get into the Tenable story.
