Over the past six months, Tenable’s stock price fell to $29.97. Shareholders have lost 11.8% of their capital, which is disappointing considering the S&P 500 has climbed by 22.7%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
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Why Is Tenable Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Tenable. Here are three reasons why TENB doesn't excite us and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Tenable’s billings came in at $236.7 million in Q2, and over the last four quarters, its year-on-year growth averaged 10.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Tenable’s revenue to rise by 7.5%, a deceleration versus its 18.9% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Over the last two years, Tenable’s expanding sales gave it operating leverage as its margin rose by 3.2 percentage points. Its operating margin for the trailing 12 months was negative 1.5%, and it must keep making strides to one day reach sustainable profitability.
Final Judgment
Tenable isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 3.5× forward price-to-sales (or $29.97 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
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