Analysis: Real Reason Why Symantec Stock Crashed 33%

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Why Symantec Stock Crashed

When Symantec Corporation (NASDAQ:SYMC) published its most recent earnings report, the results were surprising. Symantec beat expectations on sales and profit, yet its share price collapsed by more than 33%. Naturally, investors are curious as to why Symantec stock crashed.

Hint: It has something to do with Symantec’s internal investigation, which was launched soon after an employee voiced “concerns” to upper management. (Source: “FY4Q18 and Full Year FY18 Earnings Call Script,” Symantec Investor Relations, May 10, 2018.)

We first learned about the investigation during Symantec’s earnings release, and later during the conference call, when the company refused to provide any further details because it’s “an ongoing matter.”

However, CEO Greg Clark did warn investors that “financial results and guidance may be subject to change based on the outcome” of the Symantec investigation.

Translation: “We don’t know what happens next.”

On the upside, Symantec reported its internal audit to the U.S. Securities and Exchange Commission (SEC). It didn’t have to. But now that the SEC knows, Symantec is more likely to have a favorable sentencing should the review go badly.

Nonetheless, investors are spooked by the internal investigation. What will it reveal? When will it end? Will there be fines, and if so, will they throw SYMC stock off track? Questions like these create uncertainty about the future, which is as good as a poison pill for stocks.

No wonder Symantec stock dropped 33% after the announcement:

Chart courtesy of StockCharts.com

Symantec’s Internal Investigation

Symantec took a lot of heat for its decision to notify the SEC. People turned bearish instantly. But I think there’s a silver lining here.

Just try to imagine how this happened: one employee complained about something (we still don’t know what) to management. Rather than bury the issue, as many companies would have done, Symantec’s management elevated the complaint through the chain of command.

They didn’t try to look the other way, or hide the grievance in a bureaucratic labyrinth. They didn’t act like “evil companies” do in the movies. Instead, the complaint reached the board of directors, who then launched an internal investigation.

Isn’t this what we want from American businesses? Transparency?

I hear a lot of people gripe about the lack of accountability in Silicon Valley. Well, look at the incentives, I say.

Symantec discloses a probe at the earliest possible moment, before there are embarrassing exposés in the newspaper or regulators knocking at their door, and what happens? They lose one-third of their market cap.

If you truly want corporations to play by the rules, shouldn’t you reward displays of transparency? Sunlight is the best disinfectant, after all, so having it out in the open could help Symantec fix the issue.

I realize it creates some short-term turbulence for the company, but it’s obviously better than leaving everything buried in the shadows.

That’s why I’m not upset about the Symantec investigation. The inquiry will be conducted by the Audit Committee of the board of directors, with the help of outside counsel and independent advisors, and the SEC looking over their shoulder.

SYMC Stock Analysis

With this silver lining in hand, it’s important to take a second look at Symantec stock. After all, there’s more to SYMC stock analysis than a single conference call.

For example, below is a snapshot of the recent earnings report:

  • Total revenue increased four percent to $1.2 billion.
  • Consumer sales (+6%) drove the majority of that growth.
  • Enterprise sales dropped 10% in real, unadjusted terms.
  • Symantec benefited from a strong dollar (+$13.0 million), but not as much as in the same quarter last year (+$43.0 million).
  • Symantec has $2.2 billion in the bank.
  • Symantec chipped away at its $5.1 billion pile of debt, paying $570.0 million in the last three months. It will continue to make those payments in an effort to “deleverage [its] balance sheet.”

(Source: “Symantec Reports Fiscal Fourth Quarter and Full Year 2018 Results,” Symantec Investor Relations, May 10, 2018.)

On the whole, it was a good quarter for Symantec. Not great, but good. The problem is that the company lowered its expectations for the rest of the year.

Here’s what Symantec envisions for the next quarter:

  • Total revenue is expected to fall between five percent and eight percent.
  • Enterprise sales could shrink by up to 20%.
  • Consumer sales could grow by up to nine percent.

(Source: “Fourth Quarter Fiscal 2018 Results – CFO Commentary,” Symantec Investor Relations, May 10, 2018.)

It’s an ugly picture. After the first next three months, Symantec estimates that its financial situation could improve, but not by much, which is why markets are freaking out. They think the company is locked into a death spiral.

Analyst Take

Maybe SYMC stock is down for the count. Maybe. The combo of bad news was certainly unfortunate, but I would hesitate before marking this company for the trash pile.

After all, Symantec is still a billion-dollar company with a billion-dollar sales department. Maybe the biggest thing that’s changed is our perception of it. Before the internal investigation it was a stable, stalwart of cybersecurity; now, it’s a giant question mark.

I think that shift offers an opportunity.

Expectations are now so low that Symantec Corporation could impress the market with a less-than-disastrous quarter. In other words, SYMC stock would rise if the company simply avoids scandal for the next six months.