Late last month, Sarah Friar, a member of the influential Goldman Sachs software-analyst team, published a bullish note on Symantec (SYMC) - Get Report, advising investors that now is "a good time to take a second look."

She had a point. The battered stock had been climbing for several days, and Friar's note, which argued that shares were oversold, gave it yet another bounce. Since Aug. 25, Symantec's stock has regained roughly 9% of its value.

Friar wasn't the first to hoist the buy signal. The stock had gained ground earlier in the year as some investors decided that worries about the success of the company's $10.25 billion acquisition of

Veritas

, competition from

Microsoft

(MSFT) - Get Report

and other concerns were overblown -- or at least priced into the stock.

But it's not at all clear that the stock, which has lost nearly a third of its value since news of the merger leaked in early December, has bottomed. Some investors say that it may take another three or four quarters -- if not years -- to learn if buying Veritas was a better move than many on Wall Street initially believed.

And while Microsoft's entry into the antivirus market won't be a serious matter until next year, the company's latest forecast shows that the merger will cut Symantec's top-line growth in half this fiscal year.

Symantec, the world's premier antivirus fighter, has joined the list of "show me" stocks.

"The burden is still on management to show some returns from the acquisition," says Loomis Sayles analyst Tony Ursillo, whose company has a small position in the stock. When the acquisition was announced last year, Wall Street looked at Symantec as a company that could deliver top-line growth of 15% or 20%. "Now it's looking more like a 10% to 15% growth company," he says.

Indeed, growth in the company's core business -- consumer antivirus products -- has slowed dramatically, from as high as 66% in the third quarter of 2004, to 28.2% in the recently reported June quarter. Overall revenue growth slipped to 25.8% in the quarter, more than 15 points lower than in most of 2004.

Catching a Bid
Symantec shares have worked their way back.

Commenting during the company's first-quarter earnings call, CEO John Thompson said that as expected, "our consumer performance returned to a more normal pattern than we experienced prior to the high-profile-threat environment of the last three years."

It's also likely that the so-called law of large numbers made the slowdown inevitable; after all, a growth rate of more than 60% can't be sustained indefinitely. But the consumer business has been the company's bedrock, accounting for 51% of overall revenue in the last quarter, so any slowing -- no matter how understandable -- raises questions.

"At this point, there are execution questions and rightly so," says Ken Allen, an analyst with T. Rowe Price, which holds a large position in Symantec. "If it has a good quarter and shows that the integration with Veritas is doing well, and they execute in the core business, the stock can get a higher multiple," he said during an interview.

Allen says that at the moment, the company's valuation isn't all that high compared with the market at about 22 times calendar 2005 earnings and 18 times 2006 earnings. And on a price-to-free-cash-flow basis, the stock looks cheaper, trading at roughly 17 times or 18 times cash flow.

Legg Mason analyst Todd Weller said in a recent note that he walked away from a meeting with Symantec's management "less concerned about acquisition integration risk, and with a better, though still hazy, understanding of some long-term potential synergies" from the merger.

Even so, he is staying "on the sidelines" with a hold rating. Legg Mason does not have an investment banking relationship with Symantec.

But success -- or failure -- may be difficult to measure. Now that the acquisition of Veritas is complete and the revenue of both companies is combined, a valid comparison with the past is going to be tricky for four quarters or so.

In addition, the business models of the two companies were disparate. Historically, Symantec's business has been more or less evenly divided between the fast-growing consumer segment and the slower-growing enterprise business. Veritas, which developed storage-network management software, had no consumer business at all.

Going forward, consumer revenue will account for just 25% of revenue overall for the combined companies.

Core Slowdown
Sales growth rates are shrinking

Source: Company Reports
Note: Percentages represent YOY growth rate

Not surprisingly then, the result will be lower overall growth. In fiscal 2006, the company expects combined non-GAAP revenue of $5.13 billion. Non-GAAP guidance includes Veritas-deferred revenue, amortization of acquisition-related intangibles, in-process R&D costs, amortization of deferred compensation and restructuring charges.

Combining the companies into a theoretical whole on the same basis, CFO Greg Myers said last year's revenue would have been about $4.6 billion. And that yields a top-line growth rate of just 11%.

Also complicating matters is a shift in revenue recognition for consumer products from the traditional one-year license model to subscriptions recognized ratably, i.e., in equal increments over a period of time. The accounting change will knock about $40 million off the top line in the September quarter, Myers said.

Overall, the company expects a non-GAAP profit of 20 cents a share in the September quarter on revenue of $1.18 billion. Excluding items, such as Veritas-deferred revenue, the company will lose 8 cents a share on revenue of $1.05 billion.

Friar's bull case rests in part on valuation -- she believes the company is "compelling" at these levels -- and set a near-term fair value on the stock of $24.15 -- an upside of 18% at the time she wrote her note. Longer term, a multiple of 25 times 2006 earnings is appropriate, she wrote. Goldman has an investment banking relationship with Symantec.

In addition, a number of analysts have noted that September guidance seemed conservative, a "low bar" that could well be exceeded.

This is not an easy call. Slowing growth and the monumental task of combining two dissimilar companies could make for a very rough year. But the optimistic case shouldn't be dismissed lightly -- and there's always the danger that waiting for Symantec to "show you" something could mean being late for the game.