Why Morgan Stanley Is Defending Barracuda's 36% One-Day Decline

In a report issued Wednesday, Morgan Stanley analysts Melissa Gorham, Keith Weiss and Tom Mao explained why they reiterated an Overweight rating on Barracuda after the company missed expectations on the back of storage and EMEA weakness.

According to the note, after a marked decline in their price, the shares now reflect significantly inferior expectations. In addition, the firm still thinks the company can deliver 20 percent free cash flow growth over the next few years, “against a much more conservative bar.”

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Trading at 12 times CY2016 free cash flow estimates, the stock will probably “prove attractive as it sees more consistent results thru CY16,” the experts assured.

Q2 And Forward

The first two quarters of fiscal 2016 were quite disappointing for Barracuda. However, the analysts noted, execution issues usually take two or three quarters to turn around, “with the stock leading this turnaround by ~1 quarter.”

Since the company is now two quarters into this transition, the experts believe the company is poised to deliver upside in the coming quarters. A few other reasons to feel this way:

• Security remains a priority in the mid-market, and the company’s broad security portfolio looks good.
• Distribution partners are ramping. This should help the company “drive better deal volume, as well as leverage.” Moreover, the company is “2 quarters into a move to a 2 tier distribution model in Americas, with the disruptions from those moves largely behind us,” the experts added.
• Although the ramp in virtual and cloud solutions impacted negatively on billings, short-term, it will drive stronger results over the long-term.
• Management’s guidance certainly looks conservative.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.