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McAfee (NASDAQ:MCFE) launched its second IPO last week to a middling reception. As of this writing, the stock is down 20% from its IPO price. McAfee raised $740 million in the IPO, and it has a market cap of $8.1 billion after the first day of trading. Lead underwriters include Morgan Stanley, TPG Capital, and Bank of America Corp.
This poor reception perhaps summarizes McAfee as a whole. The company has had a middling decade ever since being bought by Intel (NASDAQ:INTC) for $7.7 billion in 2010 and then sold to private equity firm TPG a few years later. It struggled in its partnership with Intel, as the chip company never found a good use for an antivirus company, and McAfee watched other antivirus and cybersecurity companies surpass it. McAfee has basically stayed flat over an entire decade which has seen the tech market perform extremely well, and thus has largely been a failure.
McAfee is trying to re-market itself as a cybersecurity company which does more than sell antivirus software, but its poor reputation and finances should scare away investors. There are much more attractive IPOs or tech companies for your money, whether we are looking at the recent past or future.
McAfee these days is not a well-respected company. There are shenanigans surrounding its founder, John McAfee, who was arrested in Spain earlier this month on tax evasion charges. McAfee the founder currently has no connection to McAfee the company, but the company may take a small hit to its reputation.
The bigger problem is that to anyone with tech knowledge, McAfee is that annoying antivirus software which comes pre-installed whether you want it or not, causes more problems than it solves, and is far too difficult to uninstall. There is a tech argument that antivirus programs, whether we are talking about McAfee or Symantec (NASDAQ:NLOK) or another program, are entirely unnecessary and that relying on Windows Defender is good enough for most computer users.
Antivirus programs will still continue to be installed despite this argument, if for no other reason than that governments and businesses will use them to shield themselves from liability. But even if the antivirus market continues to grow, it is a crowded field and McAfee finds itself against competitors with a much better reputation.
These problems are unsurprisingly why McAfee has chosen to rebrand itself as a cybersecurity company which sells more than antivirus products. A cybersecurity company offers a wider range of protections such as a password manager and additional protections when conducting online shopping or banking. Cybersecurity is a field which is growing fast, with McAfee stating in its S-1/A that its addressable market is "projected to grow at a four-year CAGR of 7.9% and reach $41.2 billion in 2024." If it can re-market itself and improve its reputation, then McAfee could become a growing, valuable company.
The problem is that McAfee is neither growing nor valuable. According to McAfee's S-1/A, its revenue grew by 9.4% from 2018 to 2019 and by 8.5% from the first half of 2019 to the same time period in 2020 for a six-month revenue of $1.4 billion. These are low growth numbers for a tech IPO.
Furthermore, the aforementioned partnership with Intel and then TPG has left McAfee with a tremendous debt burden. As of June 27, 2020, McAfee has $4.6 billion in long-term debt and $7.8 billion in total liabilities. McAfee plans to use $525 million of its raised IPO proceedings to pay down a portion of this debt, which is a disappointing sign for investors who hope their funds will be used to pursue further investment.
This is not to suggest that there are no good financial news. McAfee's net income numbers are trending in the right direction, as the company recorded a net income of $31 million in the first half of 2020. Furthermore, gross profit has been steadily rising, and gross margin improved from 65% in 2018 to over 70% in the first half of 2020. But $31 million is nothing to boast of given this company's size, and its overall financial profile appears mixed at best given its middling growth. The company stands well below the Rule of 40 which is commonly used to measure tech companies.
The positive side is that McAfee is not heavily overvalued like many IPOs are. McAfee has a market cap of $8.1 billion, $4.6 billion in debt, and $257 million in cash. Calculate these numbers accordingly, and it has an enterprise value of almost $12.7 billion. If we assume a steady 9% growth rate from 2019, its 2020 revenue should be projected to be around $2.87 billion, which creates an EV/revenue ratio of 4.3. This is substantially lower compared to other, similar companies.
Despite its myriad problems, there is a path on which McAfee can be successful. If it can rebrand itself as a cybersecurity company instead of an antivirus company, it could start growing and become profitable again. The fact that it has a low valuation means that this could be a moment to buy low.
But that low valuation exists for a reason. In the present, McAfee is a company focused on the declining field of antivirus software, has not grown rapidly over the past few years, and is not profitable.
Cybersecurity is hardly a brand-new market, and yet McAfee has failed to take advantage of this new market to grow rapidly in the past. Why should investors expect that to change in the future? While McAfee has a host of new leadership such as CEO Peter Leav and CFO Venkat Bhamidipati, the two men have experience in working for established companies such as Motorola or Providence according to their backgrounds as reported in the S-1/A as opposed to raising a startup out of nothing with rapid growth. And what investors should want to see out of McAfee more than anything is growth and innovation.
There are far better cybersecurity companies on the market such as CrowdStrike (OTC:CRWD) or even Microsoft (NASDAQ:MSFT). If you are interested in McAfee, consider waiting until it can actually lower its debt load with other people's money or improve its revenue growth.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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