NetScout Systems Stock: A Contrarian Situation That Could Return Big for Patient Investors

NetScout systems stock
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NetScout Systems Ideal for the Contrarian Investor

A look at the one-year price chart of NetScout Systems, Inc. (NASDAQ:NTCT) mimics the downward slope of a ski hill, and that doesn’t bode well for technical traders.

NTCT stock saw its 50-day moving average slide below its 200-day moving average in August 2017, in a bearish technical formation known as a death cross.

The thing is, there could be more downside moves on the horizon for NTCT stock. Failure to attract buyers at the current $25.00 level could see NetScout Systems stock retest support at $20.00, representing a potential downside move of 20%.

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Chart courtesy of StockCharts.com

So why would you want to consider NTCT stock, given the chart risk?

My bullish argument for NetScout Systems stock is that the company does have good technologies around network security, which will have strong tailwinds.

In my view, NetScout Systems is an aggressive contrarian investment that could return healthy gains on the chart if the company can figure out its operations and deliver stronger results.

NTCT stock is not for the nervous investor due to the downside risk, but, if you want to play a possible turnaround and assume the risk, NetScout Systems is worth a look.

Why NTCT Stock May Be Set for a Rally

A look over the past few years shows a mid-cap technology growth stock that increased its revenues from $396.65 million in FY14 to $1.16 billion in FY17, representing an impressive compound annual growth rate (CAGR) of 43%.

The bad news is that NetScout Systems is facing some difficulties on the revenue side, with revenues expected to contract 15.4% to $1.02 billion in FY18 and remain flat in FY19. (Source: “NetScout Systems, Inc. (NTCT),” Yahoo! Finance, last accessed March 23, 2018.)

NetScout Systems will need to deal with its revenue issues to convince the market that it has turned the corner and that better times are ahead. Otherwise, we could see NTCT stock at $20.00.

An encouraging sign is that management has been able to improve the company’s gross margins to 70% in FY17, versus 65% in FY16.

The fact that earnings are slated to decline to $1.40 per diluted share in FY18 (compared to $1.80 per diluted share in FY17) is negative. Hopefully, NetScout Systems can sort things out. In FY19, there is optimism as the estimates range from a consensus $1.64 per diluted share to a high of $1.80 per diluted share.

Analyst Take

My bull case for NetScout Systems stock is contingent on the company being able to deliver its consensus earnings per share (EPS) in FY19, which would equate to an attractive forward multiple of 15.73-times.

If NTCT can deliver its high estimate, the resulting multiple of 14.33-times would be darn attractive, especially if the revenue lag can be dealt with. In this case, NetScout Systems stock could rally 50% and still not be expensive.