AI-Driven Cyber Threats Will Pressure Margins Yet Ultimately Support Exposure Management Demand

Catalysts

About Tenable Holdings

Tenable Holdings provides cybersecurity exposure management solutions that help organizations shift from reactive breach response to proactive risk prevention.

What are the underlying business or industry changes driving this perspective?

• Although Tenable One is benefiting from a gradual reallocation of security budgets toward proactive exposure management, the fact that more than 95 percent of current cybersecurity spend still sits in post breach tools means that any slowdown in this shift could temper platform expansion and keep revenue growth near low double digits rather than accelerating meaningfully.
• While AI accelerated threats are expanding the need for unified visibility across cloud, identity, OT and AI workloads, Tenable must continually invest heavily in R&D just to maintain differentiation in this fast moving landscape. This could compress operating leverage and cap further net margin improvement if innovation spend outpaces incremental earnings.
• Although traction in OT and critical infrastructure security positions Tenable to participate in large scale modernization and AI data center build outs, the long deployment cycles and demanding technical requirements in these environments risk elongating sales cycles and delaying the revenue and billings uplift that investors are implicitly expecting.
• While integrations with more than 300 third party tools strengthen Tenable One as an open platform, dependence on external ecosystems and competitive cloud security vendors introduces execution risk around data quality and joint go to market. This could limit average deal size growth and constrain net dollar expansion beyond the current low 100s percentage.
• Although longer term contracts and rising remaining performance obligations signal customers are making strategic commitments to Tenable One, extended durations combined with changing upfront billing patterns may continue to dampen calculated billings growth and obscure underlying earnings power. This could slow the pace of any re rating tied to improving free cash flow.

Assumptions

This narrative explores a more pessimistic perspective on Tenable Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Tenable Holdings's revenue will grow by 8.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.4% today to 4.1% in 3 years time.
• The bearish analysts expect earnings to reach $52.1 million (and earnings per share of $0.42) by about January 2029, up from $-33.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 83.7x on those 2029 earnings, up from -80.9x today. This future PE is greater than the current PE for the US Software industry at 31.7x.
• The bearish analysts expect the number of shares outstanding to decline by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term shift from reactive post breach tools to preemptive exposure management could progress more slowly than management expects. This would limit Tenable One adoption and keep revenue growth closer to high single digits rather than reaccelerating, ultimately constraining earnings growth.
• Sustained double digit increases in research and development and AI innovation spending needed to stay ahead of fast evolving AI driven threats may outpace top line growth over time. This could erode operating leverage and put pressure on net margins and free cash flow generation.
• Increasing deal sizes, multiyear contracts and changing upfront billing patterns are already causing divergence between revenue, calculated billings and remaining performance obligations. If contract durations keep lengthening, this accounting dynamic could obscure underlying momentum and make earnings growth appear weaker during periods of macro stress.
• Greater reliance on large strategic platform consolidations, including U.S. federal and critical infrastructure customers, increases exposure to elongated sales cycles, policy driven spending pauses or competitive displacements. Any of these could slow renewal momentum and reduce net dollar expansion, weighing on future revenue and earnings.
• The rapid expansion of an open ecosystem with more than 300 third party integrations, while a differentiator today, introduces long term execution and security risks around data quality, interoperability and partner stability. These risks could undermine Tenable One’s value proposition and put both revenue growth and profitability at risk if issues emerge at scale.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Tenable Holdings is $29.0, which represents up to two standard deviations below the consensus price target of $37.47. This valuation is based on what can be assumed as the expectations of Tenable Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $29.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.3 billion, earnings will come to $52.1 million, and it would be trading on a PE ratio of 83.7x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $22.73, the analyst price target of $29.0 is 21.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.