Goldman Sachs Explains Why Its Proofpoint Call Was 'Wrong'

Sometimes even Wall Street's top analysts are wrong. Since Goldman Sachs downgraded Proofpoint Inc (NASDAQ: PFPT) in late March to a bearish rating, the stock has returned 60 percent.

The Analyst

Goldman Sachs' Gabriela Borges upgraded Proofpoint from Sell to Neutral with a price target lifted from $84 to $112.

The Thesis

The case against owning Proofpoint's stock was based on the belief that its growth and market share would "moderate" in email security and result in downside to estimates, Borges said in the upgrade note. But this view was "wrong," as the company has shown its market share in the e-mail security space remains "strong" even at a time when its biggest competitors are boosting their offerings.

Proofpoint deserves credit for its ability to increase its revenue per user from a historical average of $5 to $10 per user per email security stack to $50 to $100 per user per year via a comprehensive email security package, Borges said. This would account for Proofpoint's 41-percent billings growth in 2017, which was "well ahead" of the analyst's expectations of 32 percent growth, she said. 

Proofpoint is now selling products and services that could increase revenue per user up to $150 per year, according to Goldman Sachs. The company's revenue mix has become increasingly diversified, with just 44 percent of total revenue coming from its core email security. The remainder comes from the following sources, Borges said:

• TAP, which contributes 24 percent.
• Archiving, at 25 percent.
• Emerging products, at 7 percent.

Price Action

Shares of Proofpoint were trading higher by 2.4 percent midday Tuesday.

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