1 Russell 2000 growth stocks to buy during the market sell-off

The Russell 2000 the index features approximately 2,000 of America’s smallest publicly traded companies. It delivered a strong 10% gain in July, easily outperforming S&P 500 index, which traded flat for the month.

Investors anticipate up to three interest rate cuts by the US Federal Reserve before the end of 2024, which could benefit small companies, as they tend to rely on debt financing to fuel growth more than their large-cap peers great.

However, every major U.S. market index — including the Russell 2000 and S&P 500 — is in the throes of an August selloff. This could represent an opportunity for long-term investors to buy quality stocks at a discount. Here’s why the power of small-cap cybersecurity tenable (TENB 0.89%) is one to consider.

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A leader in vulnerability management

Tenable specializes in vulnerability management, which is a proactive branch of cybersecurity that involves identifying weaknesses in a company’s devices, networks and operating systems so they can be rectified before malicious actors exploit them. These tools are crucial for modern organizations with a growing digital presence as they protect blind spots that might otherwise be missed.

Tenable owns Nessus, which is the most accurate and widely used vulnerability management tool in the industry. It has become a springboard to a growing portfolio of other products offered by Tenable, which includes cloud security, identity security and a new tool called ExposureAI.

ExposureAI uses artificial intelligence (AI) to rapidly analyze security data to help managers make more informed decisions about their security posture. Tenable says it has the world’s largest repository of exposure data, including 1 trillion unique threats and vulnerabilities, so ExposureAI has the potential to be faster and more accurate than competing products.

Tenable’s entire suite of cybersecurity software products — including ExposureAI — is now available on a single platform called Tenable One. It’s Tenable’s attempt to “platform” customers, which means meeting all their vulnerability management needs under one roof. It can lead to higher revenue per customer and much higher lifetime value as opposed to them only using one or two products.

“Platformization” is a key theme in the cybersecurity industry right now, especially among leaders like Palo Alto Networks and CrowdStrike while fighting for market dominance.

Tenable continues to make progress on the bottom line

Tenable generated revenue of $221.2 million in the most recent second quarter of 2024 (ended June 30), which was a 13% increase from the year-ago period. It was also well above management’s forecast of $218 million.

Tenable serves more than 44,000 enterprise customers, but 1,793 of them spend at least $100,000 a year on its software. This figure increased by 19% year-on-year and highlights how important vulnerability management tools are becoming for larger and more complex organizations.

Tenable has a history of making losses because it spends heavily on things like marketing (its biggest expense) to acquire customers and fuel growth. But over the past year, the company has spent more cautiously to improve its bottom line in the face of a challenging global economic climate.

During the second quarter, Tenable increased its operating costs by just 11.7% year-over-year, which included just a 3.3% increase in its marketing spend. Although the company still generated a net loss of $14.5 million, it was a slight improvement from the $15.9 million net loss reported in the year-ago period.

On a non-GAAP basis (which excludes non-cash and one-time charges such as restructuring charges and stock-based compensation), Tenable actually delivered a profit of $38.1 million, which was an increase a solid 45% over the same quarter last year.

Why Tenable Stock is a Buy Now

Tenable has a market cap of just $4.9 billion, which is why it’s in the small-cap Russell 2000 index. That’s much smaller than broader cybersecurity industry leaders like CrowdStrike and Palo Alto Networks, which are valued at $55 billion and $99 billion, respectively. Both companies are in the S&P 500 index.

Sustainable stocks are also significantly cheaper than both names on a like-for-like basis, as measured by the price-to-sales (P/S) ratio. Based on the company’s trailing 12-month revenue of $852 million, its stock trades at a P/S ratio of just 5.7. This is over 50% off both CrowdStrike and Palo Alto:

PS report data by YCharts

Note that Palo Alto’s revenue grew just 15% in its most recent quarter, so it’s not growing much faster than Tenable — yet it trades at more than double its P/S ratio. Palo Alto is a fantastic company and I’m not suggesting it needs to go down in value. Instead, I think Tenable’s stock deserves to trade higher.

Tenable says its addressable market in the exposure management segment of the cybersecurity industry is worth $33 billion. Based on its current revenue, it has barely made a dent in that opportunity, meaning the company still has plenty of growth left in the tank.

The broader stock market selloff could be a great time for investors to buy the Tenable story.