Allot Ltd: Small Network Security Stock Has Big Upside

Allot Ltd Safeguards Network Infrastructure

We constantly hear about cyberattacks on networks that result in data breaches and, ultimately, financial costs to companies and other organizations.

While the cybersecurity market is dominated by major players, there are numerous smaller providers of network infrastructure software. Take the case of small-cap Allot Ltd (NASDAQ:ALLT), based in Israel for over two decades.

The company provides network intelligence and cybersecurity solutions to global communications service providers and enterprises.

Allot stock has outperformed the stock market benchmarks, advancing 77% this year.

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Look for ALLT Stock to Retest its High

As illustrated in the below chart, ALLT stock staged a major breakout from an accumulation channel in January 2021 to a record high in June.

The breakout was confirmed by the surfacing of a golden cross pattern, a bullish technical signal in which the 50-day moving average crosses above the 200-day moving average.

Allot stock is within attacking distance of its June high. The downside risk is the prior sideways channel at $14.00 to $16.50.

Chart courtesy of StockCharts.com

Steady Financial Growth

A look at Allot Ltd’s five-year revenue picture shows three consecutive years of growth. Its five-year best was $135.9 million in 2020, up by 23.5% from 2019.

Fiscal YearRevenues (Millions)Growth
2016$90.4N/A
2017$82.0-9.3%
2018$95.816.9%
2019$110.114.9%
2020$135.923.5%

(Source: “Allot Ltd.” MarketWatch, last accessed August 4, 2021.)

Allot is expected to continue its revenue growth trend, with an increase of 8.2% to $147.1 million this year and 13.8% to $167.5 million in 2022. (Source: “Allot Ltd. (ALLT),” Yahoo! Finance, last accessed August 4, 2021.)

At the same time, Allot will need to work toward delivering positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and profitability.

An encouraging sign is that the company’s EBITDA loss has improved from its five-year high in 2017.

Fiscal YearEBITDA (Millions)Growth
2016-$2.8N/A
2017-$13.7-389.5%
2018-$6.453.7%
2019-$4.528.9%
2020-$4.50.2%

(Source: MarketWatch, op. cit.)

Allot Ltd’s profitability is still a few years away. A positive sign is that the company’s generally accepted accounting principles (GAAP) earnings-per-share (EPS) loss has narrowed since its five-year high in 2017.

Fiscal YearGAAP Diluted EPSGrowth
2016-$0.24N/A
2017-$0.54-125.0%
2018-$0.3142.8%
2019-$0.2518.2%
2020-$0.27-5.6%

(Source: MarketWatch, op. cit.)

Allot Ltd’s outlook points to a pathway to profitability. The company is expected to cut its loss to $0.21 per diluted share this year and to $0.11 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

As far as the company’s free cash flow (FCF) goes, there were some encouraging signs in 2019 when Allot produced positive FCF. But then its FCF moved back to negative during the COVID-19 pandemic in 2020.

Fiscal YearFCF (Millions)Growth
2016-$5.1N/A
2017-$3.139.3%
2018-$2.519.8%
2019$5.4320.4%
2020-$17.5-423.0%

(Source: MarketWatch, op. cit.)

Allot Ltd will have time to grow its business and not be concerned about its losses. The company’s balance sheet holds minimal debt of $3.6 million and healthy cash of $101.3 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Institutional ownership of ALLT stock is relatively high. About 77 institutions hold a 74% stake in the outstanding shares of Allot stock. (Source: Yahoo! Finance, op. cit.)

Ultimately, the key for Allot Ltd will be to ramp up its revenues while moving toward positive EBITDA and profitability. The tailwinds in the network infrastructure and cybersecurity space look strong.

Consider that the company’s forward five-year compound annual growth rate (CAGR) for earnings is 89.5%, compared to -27.5% for the past five years. This indicates that Allot is expected to improve its profitability, which will likely translate to a higher share price.