Varonis’ Execution on Cloud Transition Is Crucial

We are initiating coverage of Varonis Systems VRNS with a fair value estimate of $22 per share, no economic moat rating, negative moat trend rating, and Very High Morningstar Uncertainty Rating. We currently view the shares as fairly valued, trading in 3-star territory.

We view Varonis as a strong data security vendor that occupies a tough competitive landscape. The firm’s solutions revolve around data security, privacy, and compliance. While its history stretches back to its founding in 2004, we are pessimistic on what the future holds for Varonis, as intense competition and possibly higher churn due to the firm’s ongoing cloud transition stand to exact a cost on growth and profitability.

Over the next five years, we forecast Varonis’ revenue growing at a 12% compound annual rate. In our view, data security and privacy are going to remain key areas of enterprise cybersecurity spending in the coming years. We expect Varonis to benefit from this increased demand for data security products by both landing new customers and expanding sales from existing ones.

Varonis’ security solutions are geared toward securing sensitive data in enterprises, such as financial records or sensitive customer data. In the data security space, we believe every breach carries not only financial and regulatory but also reputational damage. At the same time, attack methods are only increasing in complexity, as nefarious actors find new methods to expose their targets’ weak points and exploit them to gain access to valuable data that can then be resold or be used as leverage for ransom.