Sophos’s (SOPH) rollercoaster ride continues. The cyber-security group’s shares rose nearly a fifth on the day it revealed fourth-quarter billings were up almost a quarter, pushing full-year growth to the top-end of management’s 20-22 per cent guided range. That makes it more likely the group will hit its target of $1bn (£710m) in annual billings in 2020.
That said, Sophos is trading on a knife-edge. The shares rose to a record high at the end of last year, buoyed by infamous ransomware attacks such as ‘WannaCry’ and impressive billings growth. However, the escalating share price also raised concerns that the stock might be overrated. Indeed, in February a slowdown in third-quarter billings growth sent the shares plummeting nearly a fifth.
When Northern Trust Capital Partners placed Sophos on a “trading sell” in March, referencing slower growth, high net debt from acquisitions, heightened competition and “plenty to dig into on the accounting front”, the shares tumbled again. This decline was exacerbated by a simultaneous update from Micro Focus (MCRO) which saw the software giant’s market value cut in half, after it said sales had fallen further than anticipated since its first-half update in January. That was due to the “largely one-off” transitional impacts of the integration with HPE software – which it acquired for $8.8bn last September.
The market seemingly perceives read-across in terms of pressures affecting these companies: it is unlikely to be a coincidence that Micro Focus’s shares rose nearly a tenth on the day of Sophos’s latest positive update. However, while the companies serve the same types of clients, they provide different services - Sophos is a cyber-security specialist, while Micro Focus is a more generalist software provider.
With the EU’s new data privacy regulations coming into effect next month, demand for protective software is unlikely to wane. Companies' non-compliance could engender fines of 4 per cent of global annual turnover, or €20m – whichever is greater. However, Sophos has given no guidance on a timeline for the group turning a statutory profit. Analysts at JP Morgan have forecast statutory earnings per share of 2.8ȼ for 2019.
