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Morningstar | Symantec's Caught Between the Enterprise and Consumer Spaces; Lowering Our FVE to $17

Symantec's presence as the largest pure-play provider of cybersecurity and identity protection comes with the challenge of winning battles on the consumer and commercial fronts. The company's Norton and LifeLock brands are well known with consumers, and its Symantec enterprise solutions are generally well regarded. However, we expect this no-moat name, currently looking for its sixth permanent CEO in a decade, to be challenged by competitive pricing in the consumer space as its enterprise segment attempts to supplant firms that have developed switching costs and offer extensive security platforms. These factors dim our outlook on Symantec's growth trajectory, and we are lowering our fair value estimate to $17 per share from $19. With the shares trading modestly higher than our estimate, we advise investors to instead look to Palo Alto Networks as our best idea in the cybersecurity space.

In the enterprise space, Symantec has melded its discrete point solutions into an integrated cyberdefense platform. The solutions that protect against various threat vectors are accompanied by services, including managed security, that allow overwhelmed teams to rely on Symantec's experts. We see high growth in areas such as cloud access, secure web gateways, and data loss prevention keeping Symantec competitive. However, we expect more holistic security platforms from competitors, which are expanding from entrenched positions, to challenge Symantec's inroads into this valuable space.

We view consumer security as a difficult market due to the quantity of competitors that perpetually lower prices to swap subscribers. With a declining PC market and operating system providers installing complimentary competing products, Symantec is moving towards selling ubiquitous web protection. We think identity security is equally fraught with challenges, but we envision Symantec slightly benefiting by consumers adopting Norton and LifeLock bundles for comprehensive protection.

Symantec has relied on its presence in the cutthroat consumer market for operating profits, and we expect cloud-based enterprise security to help diversify profit inflows. While its evolution in the enterprise space is working toward a distinct strategy, Symantec has lacked consistency at the helm, and we expect internal disruptions and the reliance on consumer profits to inhibit sustainable operating results.

Over our explicit forecast period, we model a five-year revenue compound annual growth rate of 3% as the enterprise segment slightly outpaces consumer sales. We expect Symantec's enterprise security platform to drive growth as customers embrace Symantec's solutions beyond endpoint and email; we envision its products for web security services and cloud assess security helping to insulate any headwinds in traditional security products. In our view, enterprises are moving toward vendor consolidation to remove management complexity, and Symantec should benefit from this trend. Although we expect competitive pricing in the consumer segment, Symantec's bundling of Norton and LifeLock products may drive increased revenue as consumers look to simplify their security and identity concerns with one provider.

With increased cloud-based products, we expect GAAP gross margins to expand modestly toward 80% in fiscal 2024, from 78% in fiscal 2019. Through a continuation of concerted efforts to reel in sales and marketing with cross-selling synergies across its security platform and bundles, we expect these expenditures to decrease toward 30% of sales in fiscal 2024 from 32% in fiscal 2019 (but increasing on a dollar basis). With modest annual increases on a dollar basis, we expect Symantec's research and development costs to decline toward 18% of revenue in fiscal 2024, from 19% in fiscal 2019. These efficiencies would increase GAAP operating margin toward 19% in fiscal 2024 compared with 13% in fiscal 2019.