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Wedbush Reiterates Outperform On Proofpoint Following Muddy Waters Report

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Wedbush Reiterates Outperform On Proofpoint Following Muddy Waters Report

  • Shares of Proofpoint Inc (NASDAQ: PFPT) fell more than 4 percent on Thursday after short-selling research firm Muddy Waters pitched a short thesis at the Sohn investment conference.
  • Muddy Waters argued Proofpoint's management was "misleading" investors and "mischaracterizing" the company's status as a cybersecurity company.
  • Steve Koenig of Wedbush reiterated an Outperform rating and $82 price target on Proofpoint, noting that Muddy Waters assertions were "specious," and the company's management team is "one of the least plausible targets" for these accusations.
  • Shares of Proofpoint, a security-as-a-service provider, hit an intraday low of $62.47 on Thursday before closing the day at $69.78 – down more than 4 percent.

    Investors and traders initially reacted to Muddy Waters, a short-selling research firm, presentation at the Sohn investment conference in London. The research firm accused Proofpoint's management as "misleading" investors regarding the overall size of the market and its organic growth.

    Muddy Waters also suggested that sector-wide pricing pressures were mounting ahead of Microsoft, Google, and Amazon's entry to the market.

    Related Link: Proofpoint Crashes Following Muddy Waters' New Short Idea

    Wedbush: Proofpoint Remains A Best Idea

    Steve Koenig of Wedbush commented in a note on Friday that Muddy Waters' assertions were "specious" and Proofpoint's management team "is one of the least plausible targets" for accusations.

    Here is a roundup of Muddy Waters' accusations and Koenig's response:

    • 1. Muddy Waters: Proofpoint's losses and expanding valuation.
    • According to Koenig, any "rapidly growing" SaaS company that recognizes revenue ratably but reports its expenses up front will naturally show "profitability well below cash generation." The analyst also noted that the stock remains "well within" its 7–10x EV/revenue multiple range, which was observed over the past 12 months.

    • 2. Muddy Waters: E-mail security is not a true "cyber security."
    • Koenig stated this argument "strikes us a red herring" and cyber-attacks initiated through email "constitute the large majority of cybersecurity breaches."

    • 3. Muddy Waters: Proofpoint is exaggerating the $2.9 billion advanced threats market size in 2018.
    • Koenig cited Gartner's estimates for the market size that have moved higher over the past few years. In addition, the analyst believes the company's bookings for its advanced threat product are growing over 100 percent year-over-year.

    • 4. Muddy Waters: Proofpoint's pricing power is eroding.
    • The analyst stated that discounts to large accounts is "standard industry practice." Moreover, the company has doubled its subscription value to around $20 per user – a move that may be impossible if it was indeed seeing pricing pressure.

    • 5. Muddy Waters: Proofpoint is misleading investors regarding organic growth.
    • Finally, Koenig argued that the claim is "without merit" and the company has been "very transparent" surrounding disclosures related to organic growth.

    Koenig reiterated shares of Proofpoint with an Outperform rating and $82 price target, adding that the stock is included within the "Wedbush Best Idea" list.

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