[from the 5/9/2016 issue of Breakthrough Tech Weekly]

Varonis Systems (VRNS) provides products that allow users to manage and secure unstructured data, analyzing everything from spreadsheets, text documents, videos and emails that are created by using and extracting the relevant data. That process creates searchable data, which allows managers to classify it, see who has used it and better determine who actually needs access to the data. The real problem at this point is scale. With a market capitalization of $535 million, Varonis is a very small fish in what’s becoming a pond filled with sharks.

As data breaches have become increasingly common over the past few years (or at least more frequently reported) and more and more expensive, a lot of other companies have begun offering similar products. As a result, profits are pretty rare for the company. Over the past ten quarters, there has only been one in which earnings per share were actually positive. In the first quarter, Varonis lost $0.40 per share despite its rapid revenue growth. Looking at estimates going out several years, I only found one particularly optimistic analyst who thought the company might actually turn a full-year profit in 2019.

With the problems of scale and growing competition, analyst targets for the company’s earnings and share price have been grinding down pretty much since the company went public. So while Varonis may offer innovative products that consumers clearly want given the company’s revenue growth, it’s pretty tough to envision the shares moving much higher anytime soon. A takeover might actually be about the best thing that can happen for shareholders, but there doesn’t seem to be one on the horizon.

Sell Varonis Systems.