The Russell 2000 index is home to approximately 2,000 of America's smallest publicly listed companies. It delivered an average annual return of 7.9% over the last 10 years, but it was up by as much as 13.6% earlier in 2024 as falling interest rates and strong economic growth buoyed investor sentiment toward small-cap stocks.
The index is currently in the midst of a pullback, dropping by around 4% from its mid-October peak. Investors are exercising caution ahead of the U.S. presidential election, because there is a big difference in proposed policies between the two candidates on key business issues like the corporate tax rate.
However, stocks tend to rise over the long term regardless of which party is in the White House. Therefore, the recent weakness in the Russell 2000 might be a buying opportunity. Here's why investors might want to consider adding cybersecurity powerhouse Tenable(NASDAQ: TENB) to their portfolios.
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A specialist in vulnerability assessment
Most modern organizations have a growing digital presence, which makes them vulnerable to malicious actors that can strike at any time of the day, and from anywhere in the world. Tenable is a specialist in vulnerability management, which proactively identifies weak points in a company's networks, operating systems, and devices, so they can be patched before hackers exploit them.
Tenable's Nessus platform is the most accurate and most widely used vulnerability assessment tool in the cybersecurity industry. It also has the broadest coverage, protecting against over 91,000 common vulnerabilities and exposures. Nessus has become an effective on-ramp onto Tenable's growing portfolio of other cybersecurity software, which includes industry-specific solutions for businesses in automotive manufacturing, financial services, healthcare, and more.
Tenable says 82% of car manufacturers experienced four hours of unplanned downtime over a 12-month period, with an estimated cost of $22,000 per minute. Tenable offers advanced asset tracking, vulnerability management, and threat intelligence solutions to secure the entire supply chain and production processes, which reduces the risk of unplanned outages.
The company also offers a platform called Tenable One, which packages cloud security, identity security, and vulnerability management software together for businesses in practically any industry. It's powered by ExposureAI, which uses artificial intelligence (AI) to give cybersecurity managers clear mitigation advice, faster incident response times, and deeper insights into their organization's risk profile.
Tenable says it has the largest repository of exposure data in the industry -- including a staggering 1 trillion counts of unique threats and vulnerabilities -- that has the potential to make ExposureAI more powerful than competing products.
Profitability is in sight
Tenable generated $227.1 million in revenue during the third quarter of 2024 (ended Sept. 30), which was a 13% increase from the year-ago period, and also comfortably above management's guidance of $223 million. The strong result prompted the company to raise its revenue forecast slightly for the whole of 2024, with up to $897.3 million now potentially in the cards.
Tenable serves over 44,000 customers, which includes 65% of the Fortune 500 companies. A record 1,853 customers were spending at least $100,000 on an annual basis with Tenable as of the end of Q3. That was an 18.4% increase from the year-ago period, which highlights how important advanced cybersecurity software is becoming to larger, more complex organizations.
Tenable has a history of losses because it invested heavily in growth-oriented initiatives like marketing and research and development, but the company has been more prudent in recent quarters. It increased its operating expenses by just 9.1% (year over year) during Q3, and since revenue grew much faster, more money flowed to the bottom line.
Tenable still posted a net loss of $9.2 million during the quarter, but that was a 40% improvement from its $15.5 million net loss in the same quarter last year. On a non-GAAP basis -- which excludes one-off and non-cash expenses like stock-based compensation -- the company actually generated a profit of $39.3 million, which was a 42% increase.
Profitability is important because it proves to investors that Tenable doesn't need to burn truckloads of money to generate growth. Plus, it gives the company the flexibility to invest more aggressively in acquiring customers and developing new products, which could drive faster revenue growth in the future.
Tenable has a significant opportunity ahead, and its stock looks cheap
Tenable is in the Russell 2000 index because it has a market capitalization of just $4.7 billion, which makes it a small-cap stock. For some perspective, CrowdStrike(NASDAQ: CRWD) and Palo Alto Networks(NASDAQ: PANW) are two of the cybersecurity industry's leaders, and they are valued at $72 billion and $117 billion, respectively.
Tenable stock is significantly cheaper than both of those companies based on the price-to-sales (P/S) valuation metric. Its P/S ratio is just 5.3, which is more than a 65% discount to both CrowdStrike and Palo Alto.
CrowdStrike deserves a premium valuation because it consistently grows its quarterly revenue by 30% or more. However, Palo Alto grew its revenue by just 12% in its recent quarter, which is actually slower than Tenable's Q3 result of 13%. From that perspective, I think Tenable's valuation should be much higher -- even if its stock doubles, it would still be substantially cheaper than its peers.
Tenable values its addressable market at $33 billion, but that might be a very conservative estimate. According to Cybersecurity Ventures, cybercrime will cause up to $10.5 trillion in damage in 2025. Research firm McKinsey and Company believes businesses should be spending a collective $2 trillion on cybersecurity software every year to mitigate those threats, but they are currently spending around 10% of that.
As the financial and reputational costs of cyberattacks increase, cybersecurity spending will only trend in one direction. That's why Tenable stock might be a great long-term buy on any market dip.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike and Palo Alto Networks. The Motley Fool has a disclosure policy.
