Company Reports

We view Varonis Systems as a strong data security vendor that occupies a tough competitive landscape. The firm’s solutions revolve around data security, privacy, and compliance. While the firm’s history stretches back to its founding in 2004, we are pessimistic on what the future holds for the firm as intense competition and possibly an uptick in churn due to the firm’s ongoing cloud transition stand to exact a cost on the firm’s growth and profitability outlook.

We are maintaining our fair value estimate for no-moat Varonis at $30 following a robust first-quarter earnings report. The firm made considerable headway in its transition to its cloud-based software-as-a-service offering, which now makes up 30% of its annual recurring revenue. We expect tight macroeconomic conditions to persist in the near term, causing high budgetary scrutiny to continue as a headwind. However, as macro pressures ease up, we anticipate a reduction in elongated sales cycles and greater customer spending, combined with scale-based operating leverage, to boost margins. Shares rose marginally afterhours, but we remain skeptical of the market’s valuation of Varonis and continue to view shares as overvalued.

We are raising our fair value estimate for no-moat Varonis to $30 from $25 after the firm reported strong fourth-quarter results to close out 2023. We continue to be optimistic about Varonis’ cloud transition with software-as-a-service, or SaaS, now making up more than 23% of the firm’s annual recurring revenue, or ARR. At the same time, we expect macroeconomic pressures to gradually dissipate over the next year, lessening the impact of macroinduced longer sales cycles and increased budgetary scrutiny on Varonis’ business. Despite our fair value increase, we remain unable to rationalize Varonis’ valuation and continue to view the firm’s shares as overvalued. For investors seeking cybersecurity exposure, we’d point to Fortinet, a wide-moat security company that currently trades in the 3-star range.

We view Varonis Systems as a strong data security vendor that occupies a tough competitive landscape. The firm’s solutions revolve around data security, privacy, and compliance. While the firm’s history stretches back to its founding in 2004, we are pessimistic on what the future holds for the firm as intense competition and possibly an uptick in churn due to the firm’s ongoing cloud transition stand to exact a cost on the firm’s growth and profitability outlook.

We are maintaining our $25 fair value estimate for no-moat Varonis after the firm reported its third-quarter financial results with a weaker-than-expected top line offset by improved cash generation. Encouragingly, the firm continued to execute strongly on its software-as-a-service transition, with Varonis SaaS now making up more than 15% of the firm’s annual recurring revenue, or ARR. At the same time, we believe the firm’s near-term results will continue to be affected as customers confront a turbulent macroeconomic environment with financial prudence and budgetary scrutiny leading to longer sales cycles. The firm’s shares traded flat afterhours and we view them as overvalued. For investors seeking cybersecurity exposure, we’d point to moatier companies under our coverage from both a valuation and a quality perspective.

We are raising our fair value estimate to $25 from $22 for no-moat Varonis after the firm closed out its second quarter with strong financials including higher-than-expected annual recurring revenue, or ARR, growth. As we have highlighted previously, Varonis is moving its solutions over to the cloud, which stands to have an impact on near-term profitability and revenue growth. We believe Varonis’ cloud transition is the right step and necessary in a cloud-first world, in which customers increasingly look to cloud security solutions to protect their IT assets. At the same time, however, we believe that heightened budget scrutiny during a time of macro uncertainty could damp Varonis’ financial performance. Varonis’ shares are up 2% after hours, and we view them as currently fairly valued relative to our updated valuation.

We view Varonis Systems as a strong data security vendor that occupies a tough competitive landscape. The firm’s solutions revolve around data security, privacy, and compliance. While the firm’s history stretches back to its founding in 2004, we are pessimistic on what the future holds for the firm as intense competition and possibly higher churn due to the firm’s ongoing cloud transition stand to exact a cost on the firm’s growth and profitability outlook.

We maintain our $22 fair value estimate for no-moat Varonis Systems after the company reported first-quarter financial results largely in line with our expectations. As a company in the middle of a SaaS transition, we expect Varonis’ near-term profitability and revenue growth to be affected as clients switch over to its SaaS offering, with lower upfront revenue recognition negatively affecting sales growth and operating margins. We also believe that the firm’s cloud transition could open it up to heightened churn as customers, instead of adopting Varonis’ SaaS offering, could opt for a competitor’s platform. More near term, however, we expect continued demand for Varonis’ SaaS offering. We believe that in a period of heightened budget scrutiny, Varonis’ SaaS platform may find willing buyers due to its lower upfront costs relative to its on-premises offering. Varonis’ shares are trading flat afterhours and we view them as currently fairly valued.

We view Varonis Systems as a strong data security vendor that occupies a tough competitive landscape. The firm’s solutions revolve around data security, privacy, and compliance. While the firm’s history stretches back to its founding in 2004, we are pessimistic on what the future holds for the firm as intense competition and possibly higher churn due to the firm’s ongoing cloud transition stand to exact a cost on the firm’s growth and profitability outlook.

We are initiating coverage of Varonis with a fair value estimate of $22 per share, no economic moat rating, negative moat trend rating, and very high uncertainty rating. We currently view shares as fairly valued and trading in 3-star territory.