The Roller Coaster Ride On Imperva (IMPV) Stock: Should You Buy A Ticket?

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Imperva Inc (NYSE: IMPV)

Imperva is proving itself to be an “E” ticket roller coaster ride, with rumors surfacing again on Wednesday of an imminent takeover by a who’s who of suitors.   Names like Cisco and IBM top the list of potential acquirers. The stock traded sharply higher, then lower, and than had what amounted to a lackluster follow-through from the initial excitement, as IMPV closed down just under 2% on the day.

The market has been aware of the takeover speculation, and to be quite honest, the reaction has been relatively muted with most analysts who cover the stock tending to agree on one primary fact – there won’t be much premium given to IMPV if a sale of the company is, in fact, consummated.

Imperva made no secret of their desire to be sold, hiring Qatalyst Partners in their effort to expedite the “strategic alternatives” available to them, but most investors understand that phrase, which, in most cases, means, “find us a buyer at the best price possible.”

IMPV, on its own, is a tough stock to support. The company had healthy revenues in 2015 that were in excess of $230 million dollars. But, unfortunately, those revenues were offset by a $47 million dollar loss during that same period. So, what is it that the company can actually offer a suitor? Let’s take a look and determine if a sale makes sense to a bigger fish and at what price investors should expect IMPV to deliver.

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What Does IMPV Do?

Imperva develops and markets cyber security products and solutions. They primarily offer these solutions through several different product offerings, inclusive of firewall protection, DDoS protection, application and database security, cloud-based security and data breach protection. All in all, a well rounded and very well designed suite of products. If you want a good lesson in the nuances and intricacies of data and cyber security protection, click here. For this article, however, let’s stay focused on whether or not investors should pay attention to the rumors and, if determined to be credible, does the risk/reward scenario offer enough potential premium to an investor looking for a large return?

Why Would Imperva Want To Sell When The World Is Screaming For Security?

Plain and simple, competition. IMPV has great products and is genuinely recognized as an industry leader in cyber security protection. However, great big companies that are saddled with mediocre management soon find themselves a small company. The cyber security industry , and I mean to use that term as an all encompassing gesture, is one that is stacked with able competition, has very low barriers of entry, and evolves at such a fast pace that if management does not stay focused on the next generation of its product offering, even while the first is barely into distribution, they often find themselves behind the technology curve.  That is a mistake that is quite difficult to recover from.

Pricing pressure, new and competitive product offerings, and margin contraction are the daily challenges that face management on a regular basis as they work to survive and prosper in the industry. There is no doubt that the need for cyber security and data-based protection is at an all time high. Threats from foreign conspirators, political espionage, and financial fraud are just three reasons that the business of IMPV is not going to become obsolete anytime soon.

Imperva can offer suitors several advantages, allowing them to seamlessly add value to their existing security applications that could justify the acquisition.

IBM, for instance, is one of those behemoths that became involuntarily downsized due to its less than proactive position during the prior decade. Still reeling from its failure to look through a crystal ball, the company found itself a lonely ship adrift in a deep, dark ocean. And as they drifted, others continued to develop and intensify efforts to design and deliver innovative solutions to the market. IBM, unlike other potential suitors, is proficient in offering cloud-based infrastructure solutions. However, they do not have a formidable firewall protection product to allow clients a seamless interface for managed security.

With more and more client demand moving toward cloud-based services, IBM, in this instance, shows itself to be a relatively good prospect at picking up IMPV. IBM has strengths related to their cloud-based management systems and can utilize the security platforms and support as an instant value added feature to its own data management solutions. For that reason, IBM is a reliable candidate as an acquirer.

What About Cisco?

Cisco can have an immediate benefit from cloud-based security solutions, and the Imperva suite of products could be a good fit to their strategic plans. Cisco has what they call their “security everywhere” strategy, and the acquisition of IMPV could be justified, as the company’s technology can clean up and sufficiently fill the lapses of security technology within the Cisco “security everywhere” platform.

Cisco needs help in becoming a security provider. They lack the technology needed to be considered a full end-to-end security provider. Cisco could immediately benefit from Imperva’s DDoS and firewall applications, areas of which Cisco is not actively pursuing to advance within their own sku of products.

Cisco could also immediately benefit from Imperva’s expertise in data security and encryption products, allowing them to become a more complete provider of fully integrated software and security systems to its business clients. Also, Cisco has not been shy in the acquisition department, as during the previous year they acquired 11 companies, several of which are security-based developers and vendors, taking advantage of other peoples expertise as they continue on their own effort to regroup from a relatively lackluster performance in the sector.

Cisco, like IBM, is a compelling consideration. They are spending cash and acquiring other peoples expertise. Can investors expect that Cisco will be knocking on the door? It’s a distinct possibility. But, don’t count your premium just yet.

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What Will A Suitor Truly Pay For Imperva?

IMPV is well recognized and has received accolades for its security application systems that are designed to protect both cloud- and home-based storage. They were named as a “Leader” by Gartner’s 2016 Magic Quadrant for Web Application Firewalls.

The company reported $234 million in revenue during year end 2015, with an associated loss of $47 million dollars for that same period. The company has well over 4000 current customers and offers technical, training, and professional services. During its most recent call, management slashed its FY 2016 revenue guidance by over $50 million dollars, demonstrating worsening conditions related to the competitive landscape in the industry.

Realistically, I view IMPV as a strong buyout candidate, however, absent such an event, the stock may drift endlessly lower as the competition continues to constrict its ability to be aggressive in pricing, leading to declining revenues in an industry filled with copycat providers and low entry barriers.

Even with IBM and Cisco perhaps leading the investment community dialogue in relation to the fit that Imperva would offer each of them, I believe that Imperva today has demonstrated the range in which they will be acquired, if, in fact, they are.

The tape hit $57 and change and rode its way all the way back down to close below $51 a share. Smart money is telling investors that the value may already be priced in for IMPV. And, if a deal does not come to fruition, I can see the stock falling back an additional 25% based on the factors already discussed.

IMPV might offer investors an entertaining ride as a swing-trade candidate. However, for those looking to attach to Imperva in hopes of a significant premium to current value, the risk does not justify the suspense.

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Kenny Soulstring is the Chief Strategic Analyst at CNA Finance. Right now, we’re offering free subscriptions to his analysis, but that won’t last forever! Get in FREE while you can by subscribing below!

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