Avast has had to work quickly to plug a hole below the waterline. Last month, the cybersecurity company got caught plundering the personal information of 100 million users and selling it to advertisers. Its frothy share price duly sank.
Superficially, the reaction looked severe, however hair-raising the revelations. Jumpshot, Avast’s data analytics wing, had been quietly sharing data on users of its anti-virus products with the likes of Google and Microsoft. It was anonymised, but included such a treasure trove of information — from browsing history to location — that it would have been easy to identify users.
For the likes of Facebook, such behaviour is part of the daily grind of snooping on users and serving up targeted adverts. So it may seem unfair that the Prague-based Avast had £1 billion sliced from its market value.
The difference, though, is one of trust. No one is under any illusions how Facebook makes its money, but for a company like Avast, which sells virus detection and anti-tracking software, prying on users is not a good look.
Ondrej Vlcek, chief executive, is shutting Jumpshot down. Yet the controversy continues to cast a shadow over Avast, which has barely put a foot wrong since its float at 250p a share in May 2018. After closing up 2½p, or 0.5 per cent, at 462¼p yesterday, it is valued at £4.64 billion. Until its data harvesting troubles, Avast had been poised to break into the FTSE 100, the big league of London’s listed companies.
The company was founded in 1988 by Eduard Kucera and Pavel Baudis, Czech computer researchers. It has 435 million users of its free cybersecurity product, with 12.4 million consumers subscribing to paid-for anti-virus and anti-tracking products. More than three quarters of its revenues come from desktop computer products, but it also sells mobile phone software and has a small business division.
After the allegations were published in the trade titles Motherboard and PCMag, Mr Vlcek ordered a review of Jumpshot and the following day said that he would wind it down. The decision was brutal, but a necessity, with one analyst likening it to an “amputation”. Avast simply couldn’t afford to let the scandal spread to other parts of the corporate body. It makes tidy profits selling virtual private network software, which allows buyers to browse anonymously. Mr Vlcek, 42, who first worked for Avast as a teenage intern, has a 2 per cent stake and draws a token $1 a year in salary.
The company is sacrificing fairly modest sums to clean up the mess. Jumpshot generated revenues of $36 million — 2 per cent of the group total — and earned adjusted underlying profits of $7 million. Avast will spend $61 million to buy back the 35 per cent of Jumpshot that it sold to Ascential, the business data provider, in July. It will cost Avast a further $15 million to $25 million to close Jumpshot.
The cost of exiting online advertising is not large enough to merit a £1 billion slump in its market capitalisation. Avast knocked a couple of points off its forecast for underlying revenues, which it expects will grow in the mid-single digits. Again, the impact is hardly catastrophic.
Some analysts fear that Avast could be blown away if Apple or Microsoft were to fit equivalent safety tools into their operating systems as standard. For now, though, Avast has a respectable base of paying customers. Its shares trade on a multiple of about 17 times earnings forecasts for the current year, an attractive rating for a software stock. This column tipped Avast at 285p in October 2018. After the recent slide, they are worth another look.
ADVICE Buy
WHY Shares are trading at a much more attractive valuation after data harvesting furore
Royal Mail Group
As the Royal Mail postal trolley continues to hurtle downhill, the time is fast approaching to work out whether there may be some value in a basket responsible for delivering 1.3 billion parcels a year in the UK (Robert Lea writes).
With the shares closing last night at another low, off 2½p at 176½p, this is especially true for those private investors who bought Royal Mail at 330p in October 2013, might not have cashed-in in the following months when the share’s price soared to more than £6 and who are still holding paper that has as good as halved in value.
In many ways nothing has changed in the investment case, such as it is, for Royal Mail. The number of letters being sent is in chronic decline. It remains a hugely unionised organisation. It is still a business that has not been greatly modernised or automated. The market for parcels delivery is growing at a double-digit rate because of the transition to internet shopping.
What we do know, though, is that letter volume declines have accelerated to up to 9 per cent a year; and Royal Mail’s share of the overall parcels market is diminishing, since its parcels business is growing at only 4 per cent per annum. What that adds up to — along with the failure to increase productivity and efficiency by bringing in automated parcel sorting machines — is that next year Royal Mail will not make any money from its British operations.
That effectively leaves that Royal Mail shareholders invested in GLS, the group’s European and north Amercian parcels business. Or, put another way, they hold shares in a group now valued at only £1.76 billion, based on the earnings of an overseas business that makes annual operating profits of about £180 million a year.
Some may argue that, on that basis, Royal Mail’s shares are now fairly valued. However, for a company at war — again — with its unions and a new chief executive struggling to make any sense of it all, best of luck with that.
ADVICE Avoid
WHY Too many legacy issues weighing down the business
