Have An Anti-Viral Christmas

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While it's still early days for the Santa Rally, the past couple weeks have offered a handy boost for stocks already enjoying solid periods of price growth.  

One stock, AVG Technologies (NYSE: AVG), has experienced not just a rally, but a rally backed by solid volume buying.  The spark for this rally was a stellar earnings report, which comfortably took the stock out of a summer rut.  

For growth orientated investors, this offers a nice setup.  It has a Market Cap just below $1 billion, and a small float at just over 11 million shares.  When you look at the price action since October, there have been three days when it traded over the 1 million share mark, with one of those days pushing over 2 million.  This level of turnover sets up a solid base of shareholders who have paid between $10 and $12 a share.  In this scenario, it becomes difficult for new buyers to come in at value, because few people are willing to sell on the cheap.  This fuels higher bids, and ultimately, higher prices. It also makes the stock very sensitive to good news, as the recent pop following the announcement of a new agreement with Google demonstrated.

Positive price action has also defined a floor for the stock, following a rocky start on its IPO. AVG had the worst 1-day performance of an IPO for the year, but the past few weeks will have consigned this to history.

AVG operates in the competitive space of internet security.  The company pits itself against the likes of Symantec's (NASDAQ: SYMC) Norton and Microsoft's (NASDAQ: MSFT) Essentials, in addition to a number of private and smaller anti-virus software vendors.  The company offers a range of packages: running from a basic free package, which competes against Essentials, to a commercial product suite, more in line with Norton's offering. It also offers packages suitable for Small Businesses.  AVG's free anti-virus package is held in high regard, as determined by PC Mag, PC Advisor, amongst others. Next year's release is likely to continue this form.  Despite the advantages its software offers, AVG appears to lag in brand awareness, as this small study would appear to demonstrate.  In global terms, Avast Software holds the most market share at 16%, up from 12% in 2011.  Avast Software has a significant lead in market penetration, but in the second tier of providers, AVG has a healthy 11% global market share, ahead of Microsoft's and Symantec's 10%. AVG suffered the greatest relative loss for the 6 months of 2012, with Microsoft managing a gain.

Despite the shifting trends, AVG was still able to report quarterly earnings of $95 million, up 34% from the comparative quarter a year ago and ahead of street expectations of $85 million.  AVG's active user base climbed to 143 million users, with 20 million mobile users.   Given annual revenue expectations of $358 million, we can draw a basic assumption - at an average price of $50 per product - that AVG has around 7.2 million paying users.  One of the key drivers for revenue growth in Symantec's business division, was the up-selling of customers to premium suites, this despite difficult business conditions.  With approximately 5% of AVG's user base paying for services, there should be room to up-sell owners of the $55 package to the $70 suite, or getting business users to move from the $90 to the $125 studio.  What will be harder, will be getting users of their excellent free package to upgrade to a paid product; unfortunate victims of their own success!

AVG's year-on-year relative revenue growth was well ahead of Symantec's 1% growth.  Although Symantec's $1.7 billion quarterly revenue was ahead of estimates to the tune of $50 million, dwarfing AVG's reported revenue.  Earnings per share for this quarter and last were also ahead of analyst estimates, by a few cents.  Symantec's Enterprise segment (Storage and Server Management) was picked out as a bright spot with the company aiming for 5% organic growth.  Enterprise accounted for a larger segment of the revenue pie, but it was still only 14% of total revenue.  Symantec did see a 9% decline in license revenue, presumably because users shifted to free products, or products offered by other providers, such as AVG.  Comparisons against Microsoft are harder, because its anti-virus software package is free, and there is no up-sell for Microsoft.

The past couple of months have been good for AVG.  It has offered investors a baseline upon which future earnings can be measured.  It has shown good revenue growth, despite relatively flat growth from its competitors. And it has a product which again looks good for 2013.  Looks like Christmas has come early for some.

fallond has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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