By: Anil Nain
Walking into a bank with a gun and the intent to rob it is usually a bad idea, for a number of reasons. Not only is there the obvious risk that you will be caught and incarcerated for a long time or killed in the process, but you also expose yourself as being, at best, charmingly old fashioned and "old school", or at worst, and perhaps more embarrassing- technologically antiquated.
The times they are a-changing. Intellectual property and trade secrets are more easily carried around in one's pocket than cash and gold. Clown masks and hosiery-as-headgear have been replaced by remote-access digital attacks orchestrated by disparate individuals around the world; organized crime names like "Tony Bagels" and "Vinny Carwash" have given way to identities like "Anonymous" and "Lulzsec."
And the zombie apocalypse? Far more likely to be traced back to zombie botnets hacking into an electric grid than those droopy-eyed, long-faced un-deads to whom we have become endeared.
Some of the most critical threats facing individuals, enterprises and the country emanate from the cyber realm. Hackers seek to steal-and then sell-your personal information. Spies want to steal secrets, and terrorists want to attack critical infrastructure.
One thing is clear: nobody is safe from digital incursions. Perhaps FBI Director Robert Mueller put it best when he said, "there are only two types of companies: those that have been hacked, and those that will be."
Cyber security has hitherto been-and will continue to be-a continuous game of defense, and this is perhaps the most compelling characteristic of cyber security as an investment. After all, what is a company, enterprise, or individual to do in the face of such tremendous-and immutable-security challenges? For most, going offline is simply not an option, so the only real option is to explore security solutions in the market. In fact, according to Gartner Research, security spending is expected to reach $86 billion by 2016 from $60 billion last year.
So, here are a few names to consider in the IT security space as individuals and enterprises seek to mitigate against ever-increasing cyber security threats.
Check Point Software Technologies (CHKP): The Israel-based provider of IT security solutions offers a variety of both software and hardware products covering networks, gateways, data and management. The company's products are used by all of the Fortune 100 and most of the Fortune 500 companies. Checkpoint reported total revenue of about $1.34 billion for full-year 2012, an increase of 8% over 2011, well distributed geographically across the Americas (45%), Europe (37%) and Asia, the Middle East and Africa (18%). Net income was $620.0 million, a 14% increase from 2011, and cash flow from operations was around $815.8 million, also a 14% increase over 2011. The stock has traded in a P/E range between 11x and 23x over the past five years, and is currently trading at a P/E of 17.4x above the $50 mark in 2013 for the first time since last summer.
Symantec Corporation (SYMC): With a $17 billion market cap and revenues of $6.7 billion in 2012, Symantec is one of the world's largest software companies. In its most recent quarter, the company reported revenues of $1.79 billion, up 4.4% year-over-year. Symantec has traded in a P/E range between 9x and 20x over the past five years and is currently trading at a P/E of 15.6x close to $24.50 a share. Due to the fact that it's always crucial to pay attention to hedge fund sentiment for these very reasons, we should mention that Symantec experienced capital inflows from the hedge fund industry of about $140 million-14% higher than one quarter earlier.
Fortinet Inc. (FTNT): Fortinet provides "broad, integrated and high performance protection against dynamic security threats while simplifying the IT security infrastructure for enterprises, service providers and government entities worldwide." The company generated $534 million in 2012 revenues, up 23% year over year, and cash flow from operations was a solid $184 million. Fortinet ended its most recent quarter with cash, cash equivalents and an investments balance of $740 million with no debt.
That's quite a position to be in, and it's no wonder why hedgies like Steven Cohen and Dmitry Balyasny were upping their stakes. In fact, while the number of funds invested in Fortinet (26) fell by four last quarter, aggregate capital grew, indicating that this may be shaping up to be a battleground stock for the remainder of 2013. The company's strong financial position seems to indicate that bulls should come out victorious.
Palo Alto Networks (PANW) and Sourcefire (FIRE): Palo Alto network made its public debut in mid-2012. In the company's most recent quarter (Q2, FY2013), total revenue grew to $96.5 million, an increase of 70.2% year-over-year and 12.3% sequentially. The company finished January 2013 with cash, cash equivalents and investments of $368.3 million. In Q2, cash flow from operations was $34.5 million, free cash flow was $28.3 million and free cash flow margin was 29.3%.
These are impressive figures, and Sourcefire, meanwhile, exhibits a similar attractiveness. The company increased revenue for full year 2012 by 35% to $223 million, and fourth quarter revenue was $67.4 million, up 27% over the previous year. Sourcefire ended 2012 with cash, cash equivalents and investments totaling $204 million, and the cyber security tech player trades at lofty valuation metrics, but its key potential is as a momentum play. Wall Street's top-level price target represents an upside of 15% from current levels.