1 Small-Cap Stock Down 34% to Buy on the Dip

Investors snapped up shares of some of America's largest artificial intelligence (AI) companies over the past couple of years, which isn't surprising since their incredibly strong returns have provided most of the propulsion that has driven the S&P 500 to back-to-back annual gains of more than 25%. The last time the market had a two-year stretch like that was in 1997 and 1998, as it headed toward the early 2000 peak of the dot-com bubble.

But there are some AI opportunities at the smaller end of the market that might be getting overlooked. Tenable (NASDAQ: TENB) is a leader in the vulnerability management segment of the cybersecurity industry, and it's using AI to deliver better protection for its customers than ever before. Tenable stock remains 34% below its all-time high from 2022, but here's why investors might want to buy the dip.

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Image source: Getty Images.

A leader in vulnerability management

Vulnerability management is a proactive form of cybersecurity that identifies weaknesses in a company's networks so they can be fixed before malicious actors can exploit them. It's increasingly important in the digital age, because most businesses rely on technologies like cloud computing to run their operations, which means they are exposed to cyberthreats around the clock.

Tenable's Nessus platform is the most accurate vulnerability management tool in the industry, and it's also the most widely deployed with over 2 million downloads. However, it's more of an on-ramp to Tenable's broader enterprise cloud security platform, which covers services from identity management to data protection.

The cloud platform also features a new tool called AI Security Posture Management (AI-SPM). Businesses are deploying AI software to make their operations more efficient, which often involves plugging their valuable data into third-party models like those from OpenAI, creating new vulnerabilities in the process.

AI-SPM helps businesses secure that data, but it also plugs into popular cloud-based AI development platforms they might be using, including Microsoft's Azure AI Services and Amazon Bedrock, to identify other vulnerabilities. From there, it provides remediation instructions to mitigate any serious risks.

Finally, larger customers with more complex needs beyond the cloud can also opt for Tenable One. It's a full-stack platform designed to extend AI-powered protection to every information technology asset within the organization. It features tools like ExposureAI, which uses data from 1 trillion unique threats to identify risks and provide immediate advice to cybersecurity managers on how to eliminate attack paths.

Tenable's revenue growth decelerated in 2024, but there was a silver lining

Tenable generated a record $900 million in revenue during 2024, which was a 13% increase from the prior year. That was a deceleration from the company's 2023 growth rate of 17%, which usually isn't a good sign.

However, Tenable decided to spend less aggressively on growth-oriented costs in 2024 in order to improve its profitability. The company's operating expenses only increased by 5.9% for the year, including a tiny 0.5% increase in sales and marketing spending (its largest cost).

The result was positive. Tenable still lost $36.3 million at the bottom line on a GAAP (generally accepted accounting principles) basis, but that was a 53% reduction from its $78.2 million net loss in 2023.

Plus, on a non-GAAP basis, which strips out one-off and non-cash expenses like stock-based compensation, the company was profitable to the tune of $158.6 million. That was a 63% jump compared to 2023.

Tenable is proving it can still deliver modest top-line growth while maintaining cost discipline, which is driving significant improvements on the bottom line. As the company's profitability improves further, it will have the flexibility to redirect money back into growth initiatives like marketing, which could trigger faster revenue growth in the future.

Tenable stock is cheap relative to its cybersecurity peers

Since Tenable isn't profitable on a GAAP basis, it wouldn't be appropriate to use the price-to-earnings (P/E) ratio to value its stock. However, we can use the price-to-sales (P/S) ratio.

Tenable's P/S ratio is currently 5.3, which is significantly cheaper than many of its peers in the cybersecurity industry including CrowdStrike, Palo Alto Networks, and Zscaler:

PS Ratio data by YCharts.

Those companies haven't reported their latest quarterly results yet, so we don't have apples-to-apples figures to use for comparisons. However, in their most recently reported quarters, CrowdStrike, Zscaler, and Palo Alto grew their revenues by 29%, 26%, and 14%, respectively. Since investors will typically value faster-growing companies at higher P/S ratios, CrowdStrike and Zscaler have earned their premium valuations (though it's debatable whether CrowdStrike deserves to be more than five times as expensive as Tenable).

However, Palo Alto isn't growing much faster than Tenable right now, yet its P/S ratio is three times higher. If Tenable stock doubled from where it trades as of this writing, it would still be substantially cheaper than its peers.

Tenable's management sees its addressable market as being worth $33 billion, so it has barely scratched the surface of its long-term opportunity. That market could grow even larger in the future as more businesses start deploying AI, which will drive demand for specialized products like AI-SPM.

As a result, this 34% dip in Tenable stock could be a great buying opportunity for long-term investors.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, CrowdStrike, Microsoft, and Zscaler. The Motley Fool recommends Palo Alto Networks and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.