A return to form for this FTSE 250 star

Having enjoyed a stunning 2017, the hangover for shares in Sophos (SOPH) finally looks to be over after the cyber security firm delivered an update in keeping with the lofty expectations of investors today.

The FTSE 250 Index (MCX) stock more than doubled in value last year as Sophos offered exposure to one of the fastest-growing technology sectors.

Shares peaked at 669p in late January before jitters set in and Sophos was punished for figures that didn’t quite meet inflated market expectations, even though the February update included no change in guidance.

The company banished those worries about recent trading today as it said it remained on track to achieve its target of annual billings of US$1 billion for the 2020 financial year. Billings growth for the year just ended was towards the top end of the previously guided range of 20-22% growth.

Shares surged more than 16% in response. With a target price of 705p, Morgan Stanley’s Adam Wood said: “We view today’s update as demonstrating that underlying momentum in the business remains.”

Wood said that as Sophos is trading at about 4.2x 2019 EV/recurring revenues, the broker continues to “view the risk/reward as attractive”. Among other analysts, JP Morgan Cazenove has a target price of 690p and UBS is at 660p.

Sophos is likely to have benefited in its most recent quarter from the latest version of Intercept X, which features the addition of a deep learning malware detection engine as well as several new anti-exploit features.

The quarter also saw the launch of the company’s latest XG Firewall product for enhanced network protection. Tougher comparisons await in the current financial year, particularly in relation to the period when last year’s WannaCry attack unfolded.

Oxford-based Sophos says it is the only vendor of any scale to explicitly focus on the mid-market, designing enterprise-grade, industrial-strength security solutions.

Its portfolio of cloud-based products protect over 280,000 organisations and over 100 million end users in 150 countries. In the $40 billion cybersecurity market it estimates that there is a $10-12 billion opportunity for the company.

And as a subscription software business, Sophos says it benefits from the financial visibility that this offers.

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