Cloud Data Security And AI Demand Will Drive Powerful Upside Potential

Catalysts

About Varonis Systems

Varonis Systems provides a data security platform that protects sensitive data across on-premises and cloud environments through automation, threat detection and managed defense.

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

• Completion of the SaaS transition, with 76% of ARR already from SaaS and a target of 83% by year end, positions Varonis for structurally higher growth, more predictable recurring revenue and rising free cash flow as conversion drag fades and upsell accelerates. This supports durable double digit ARR expansion and margin improvement.
• Surging cloud data adoption and the need to secure workloads across Azure, AWS, SaaS apps and IaaS create a growing market for Varonis for cloud environments. Strong win rates versus point solution DSPM vendors should drive higher average deal sizes, healthier SaaS net retention and expanding total revenue.
• AI driven use cases, including Microsoft Copilot and other generative AI tools, are amplifying demand for automated data classification, access control and threat detection. Varonis can monetize this need through broader platform adoption and MDDR, which should lift ARR growth and support premium pricing and net margins over time.
• Strategic product expansion with next generation Database Activity Monitoring and the AI native email security solution Interceptor extends coverage from data to email and identity. This enlarges the addressable market and enables multi product consolidation deals that can boost NRR, operating leverage and long term earnings power.
• Deepening Microsoft partnership and tighter integrations around Copilot security, combined with a unified SaaS platform that delivers automated security outcomes, create a strong competitive moat that can sustain high win rates. This can support 20 plus percent SaaS ARR growth and improve contribution margins as scale benefits flow through the income statement.

Assumptions

This narrative explores a more optimistic perspective on Varonis Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Varonis Systems's revenue will grow by 18.5% annually over the next 3 years.
• The bullish analysts are not forecasting that Varonis Systems will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Varonis Systems's profit margin will increase from -18.8% to the average US Software industry of 12.4% in 3 years.
• If Varonis Systems's profit margin were to converge on the industry average, you could expect earnings to reach $125.8 million (and earnings per share of $0.93) by about December 2028, up from $-114.5 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 86.1x on those 2028 earnings, up from -34.8x today. This future PE is greater than the current PE for the US Software industry at 32.9x.
• The bullish analysts expect the number of shares outstanding to grow by 4.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.84%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness and unpredictability in the legacy on premises subscription base, including federal, could turn the final phase of the SaaS transition into a multi quarter headwind if renewal rates remain depressed or deteriorate further. This would limit total ARR growth and weigh on revenue and free cash flow.
• The announced end of life of self hosted solutions by December 2026 risks alienating a structural subset of customers that are unwilling or unable to move to SaaS, especially in regulated or budget constrained environments. This could drive permanent churn, compress net retention and reduce long term earnings power.
• Ongoing underperformance in the federal vertical despite FedRAMP progress suggests Varonis has not yet found a scalable go to market model for that segment. A prolonged reset of the federal strategy could keep a historically stable ARR contributor flat or shrinking, pressuring margins as fixed costs are spread over slower growth.
• Sales execution issues highlighted by single threaded on premises deployments, inconsistent adherence to the company’s sales methodology and a 5 percent headcount reduction could signal deeper organizational strain during a critical expansion phase. This may limit upsell of new products like next generation DAM and Interceptor and cap SaaS ARR growth and contribution margin expansion.
• If customers facing tighter security budgets and higher scrutiny delay or downsize renewals and migrations during a macro slowdown, the combination of lower on premises renewal rates and slower than expected SaaS upsell could keep total revenue growth in the low double digits. At the same time, elevated platform investment and integration costs could restrain operating margin and net income.

Valuation

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

• The assumed bullish price target for Varonis Systems is $62.0, which represents up to two standard deviations above the consensus price target of $52.63. This valuation is based on what can be assumed as the expectations of Varonis Systems's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $125.8 million, and it would be trading on a PE ratio of 86.1x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $33.79, the analyst price target of $62.0 is 45.5% 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.