What happened
Shares of A10 Networks(NYSE: ATEN) were down 22% as of 12:39 p.m. ET on Friday, according to data provided by S&P Global Market Intelligence.
The cloud company released preliminary results for the third quarter that didn't sit well with investors. It expects revenue to be down between 19% to 22% year over year as industry headwinds continue to impact the business.
So what
A10 has averaged 9% annual revenue growth over the last 10 years but started to report falling demand in the first quarter when revenue dropped 8% year over year, followed by a decline of 3% in Q2. On the Q2 earnings call, management noted that many businesses were delaying projects. The conservative spending budgets with North American customers are catching up with the company, as management cited similar headwinds impacting its revenue for the third quarter.
It's important to note that A10 hasn't lost these customers. These are just projects that have been pushed back to later periods, so it's possible that the company will recapture this revenue in the future. This would turn a headwind into a growth tailwind.
ATEN Revenue (Quarterly) data by YCharts.
Now what
In this soft-demand environment, the company is taking steps to keep profitability up. Management expects to deliver full-year growth in adjusted earnings per share, with fourth-quarter revenue coming in between $70 million to $80 million, compared to $77.6 million in Q4 2022.
The good news is that the stock now trades at only 16x Wall Street's 2023 earnings estimate, compared to a price-to-earnings ratio of 20 before the news this week.
Organizations will need network security solutions, and the growth of 5G and cloud computing are only expanding the addressable market for A10's services. The market could be undervaluing the company's long-term growth.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends A10 Networks. The Motley Fool has a disclosure policy.
