AI And Cybersecurity Execution Risks May Ease Over Time For A Modest Upside Potential

Catalysts

About N-able

N-able provides an AI powered cybersecurity and IT management platform focused on small and midsized organizations, largely through managed service providers and VARs.

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

• Although the company is already embedding AI across its security operations and unified endpoint management suites, the heavy reliance on AI driven automation means any quality issues or misconfigurations could weaken its security outcomes and limit the uplift to revenue and net margins.
• While growing data volumes and ransomware risk support interest in backup and recovery tools, execution risk around launching Disaster Recovery as a Service and Google Workspace coverage at scale could slow adoption and temper the contribution to ARR growth and gross margins.
• Although channel expansion into VARs and continued focus on larger customers are intended to increase wallet share, the added sales complexity and field investment could keep sales efficiency in check and restrict upside to earnings and unlevered free cash flow.
• While the AI SOC and Adlumin acquisition broaden the security portfolio, integrating new SKUs into existing MSP workflows across diverse environments may prove difficult, which could cap cross sell rates and their impact on dollar based net revenue retention.
• Although long term demand for cybersecurity and business resilience appears supportive across more than 500,000 end businesses, growing expectations around cyber warranties, compliance and faster recovery times may push N-able to spend more on R&D and service delivery, limiting potential improvement in EBITDA margin.

Assumptions

This narrative explores a more pessimistic perspective on N-able 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 N-able's revenue will grow by 8.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.3% today to 11.3% in 3 years time.
• The bearish analysts expect earnings to reach $74.0 million (and earnings per share of $0.39) by about February 2029, up from $-17.0 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 16.9x on those 2029 earnings, up from -52.2x today. This future PE is lower than the current PE for the US Software industry at 25.4x.
• The bearish analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI is central to N-able's product roadmap, including its AI SOC, N-zo assistant and broader automation push, so any long term issues with AI quality, reliability or security, particularly as adversaries also use AI to increase attack sophistication, could reduce customer trust and adoption, which would weigh on revenue growth and limit any improvement in net margins.
• The company is leaning heavily on new products like Disaster Recovery as a Service, Google Workspace coverage and AI specific SKUs to extend its addressable market. If demand for these newer offerings is slower than expected or they prove difficult to scale profitably across MSPs and VARs, the impact could be lower than anticipated ARR growth and a drag on earnings.
• N-able is increasing its exposure to larger customers and VARs and building out new field sales capacity. If the long term shift upmarket brings longer sales cycles, pricing pressure or higher support requirements, the result could be pressure on sales efficiency, which would limit upside to revenue and keep EBITDA margins from expanding.
• Competition in cybersecurity and IT management for small and midsized organizations is intense and long term customer expectations for cyber warranties, compliance support and faster recovery times continue to rise. As a result, N-able may need to keep raising R&D and service delivery spend to stay relevant, which would restrain gross margins and keep unlevered free cash flow growth in check.

Valuation

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

• The assumed bearish price target for N-able is $5.25, which represents up to two standard deviations below the consensus price target of $7.35. This valuation is based on what can be assumed as the expectations of N-able'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 $10.0, and the most bearish reporting a price target of just $5.25.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $653.1 million, earnings will come to $74.0 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $4.76, the analyst price target of $5.25 is 9.3% 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.