Cybersecurity drama shows opportunity in study of upstream base consolidation

It’s a problem that just won’t go away. Late last week, cybersecurity specialist CrowdStrike (CRWD) suffered an infamous outage due to a software update bug. The outage affected millions of Windows-based devices worldwide, leading to a temporary halt in operations across multiple industries, including government agencies, financial institutions, and airlines.

To be fair, CrowdStrike quickly addressed the issue by rolling back the software update and providing its enterprise customers with a manual workaround to fix affected devices. Still, the company warned that the recovery process could be lengthy for some systems. It’s no wonder that CRWD stock has been falling since the incident.

The stock has lost nearly 26% of its equity value over the past five sessions. It’s down more than 33% over the past month. Given the 4% loss in the midweek session, it’s unclear when CRWD stock will regain credibility.

Still, indirectly, the CrowdStrike drama could present an opportunity for cybersecurity firms that have, relatively speaking, kept their noses clean. One possible idea to consider is Gen Digital (GEN).

While both Gen Digital and CrowdStrike operate in the broader cybersecurity space, the latter focuses on enterprise-level solutions, with an emphasis on endpoint protection, threat intelligence, and threat mitigation. The former focuses primarily on consumer solutions, such as antivirus software, identity theft protection, and privacy services.

Overall, the commotion on the cybersecurity front is reminding average consumers of the critical importance of digital protection services.

GEN stocks may break free from consolidation

As I’ve discussed over the last few weeks, Barchart offers a range of stock screeners that help facilitate a more objective framework in the field of technical analysis. Overall, the discipline has become almost like a Rorschach test, where analysts see a series of patterns, cycles, and the like. The beauty of Barchart’s screeners is that they provide quantitative signals.

In simple terms, in order for Barchart Screener to publicly identify a potential opportunity, the asset in question must meet a number of criteria. Some of these screeners include several qualifying factors, all of which must be met in order to greenlight. This protocol helps eliminate a lot of the noise, allowing retail investors to focus on only the most promising ideas.

One intriguing tool that investors should learn about is Upwards Base Consolidation. According to Barchart, these assets are in strong uptrends but are currently consolidating near market highs. The algorithm behind this scanner identifies such bottlenecks that occur in uptrends. In this way, Barchart aims to offer ideas that could break out of their consolidation pattern.

A possible candidate for growth is GEN stock. While the stock has encountered some turbulence over the past five sessions – losing 2% in that time frame – it has gained more than 4% in the past month. Year to date, Gen Digital is up about 11%.

Now, not all corrective cycles are created equal. While GEN stock hit an unfortunate red wave, Wednesday’s overall price action remained above the 20-day exponential moving average. And that means bears couldn’t get the security close to the 50-day moving average.

What’s more, GEN stock (at $25.20 on Wednesday) is well above its 200 DMA ($21.85). Based on recent price action, it seems doubtful that the stock will fall that much. As such, the longer GEN remains sideways, the more it could encourage bulls to send the stock higher.

Financial forecasts bode well for the digital generation

Another element that could help make GEN stock an attractive buy is its current valuation combined with analyst forecasts. The stock is currently trading at 4.25X its past-year sales. That’s a bit high compared to the underlying infrastructure software sector, which has an average multiple of 3.94X. Interestingly, between Q1 2023 and Q1 2024, the average metric was 3.54X.

Still, analysts believe revenue could reach $3.91 billion by the end of the current fiscal year. If so, that would imply a growth rate of 2.6%. Next year, sales could rise to $4.04 billion, up 3.3%. Additionally, estimates on the high side are for $4.07 billion.

Assuming the outstanding shares are $626.15 million, GEN stock is currently valued at 4.04X of projected revenue in fiscal year 2025 (calendar year 2024). This brings us closer to the industry average. Furthermore, GEN stock is also valued at 3.91X of projected revenue in fiscal year 2026.

Essentially, as mentioned earlier, the cybersecurity drama likely highlights the importance of digital protection for everyday consumers. That’s exactly what Gen Digital has to offer, making GEN stock an intriguing long-term opportunity.

As of the date of publication, Josh Enomoto did not have (directly or indirectly) a position in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.