This week, there were two high profile Domain Name System (DNS) hacks, namely one on the New York Times and the other on Twitter. According to press reports, the Syrian Electronic Army claimed responsibility for these two DNS hacks. While traditional cyber security attacks such as distributed denial of services (DDoS), phishing, malware, password attacks, etc. are more commonly discussed in the media, DNS attacks are becoming more prevalent among hackers. Infoblox (BLOX), a leader in automated network control via the management of DNS, DHCP and IP address management appliances, launched its DNS security appliance in January of this year. The increasing use of DNS cyber attacks could result in increased awareness and demand of the Infoblox solution and help make this product a major success for the company, resulting in Infoblox being considered not just a leader in automated network control, but also in network security.
The DNS basically acts as a translator between the numeric IP addresses that web servers understand and the alphanumeric web address that people use to access websites on their computers, phones and tablets. Since the DNS does not actually carry or look at user traffic like emails that could contain malware in the form of a bad PDF file or URL link, and the DNS acts as a signaling protocol between a company's network and the outside world of the Internet, traditional security appliances do not typically block any DNS queries from outside the network. Blocking DNS queries would make the network seem like it is not available, thus, DNS queries are typically allowed through network firewalls. Cyber hackers have increasingly taken advantage of this DNS query vulnerability and have embedded malware into DNS queries that, if successful, allow the hacker to take control of DNS and effectively take control of what outside users see when they visit a website.
Infoblox released its DNS Firewall product in January of this year and, thus, it is a fairly new product and probably represents only a very small part of the company's revenues at this point. Infoblox management, however, did indicate on its 3Q13 earnings call that the product is doing better than expectations in the first few months of introduction. As DNS based cyber attacks gather more attention like the ones we witnessed this week on the NY Times and Twitter, Infoblox could be a beneficiary in the form of increased awareness and demand of its DNS firewall and related DNS, DHCP and IP address management products.
Infoblox is already a highly valued stock. Thus, upside from these levels will likely require ongoing "beat and raises" from the company in the upcoming quarters vs. analyst expectations. The stock trades at ~67x fiscal year 2014 earnings estimates, 7.3x EV/trailing sales and 5.62x EV/2014 sales estimates. Wall Street analysts are expecting sales growth of ~30% in fiscal 2013 and 21% in fiscal 2014. My sense is that sales growth will need to stay at ~30% to keep the stock moving higher in the near term quarters. The company has recently shown growth of 30%-plus.
Infoblox's valuation is also likely reflective of the increasing M&A activity in the security market with the recently announced acquisitions of Sourcefire (FIRE) by Cisco (CSCO) and Websense by Vista Equity Partners. Since Infoblox has a market capitalization of about $1.6 billion, its relatively smaller size vs. other security and data center appliance companies such as Fortinet (FTNT) of $3.2B, Palo Alto Networks (PANW) of $3.4B and F5 (FFIV) of $6.5B make it a bit more palatable for a potential acquirer. For example, Sourcefire and Websense had respective market capitalizations of ~$1.8 billion and $775 million before they were acquired. Infoblox's smaller relative market capitalization size, high growth rate and increasing importance of DNS security could make the company a potential acquisition candidate. It is also worth noting that part of the company's senior management team was also part of Netscreen, which was a security company acquired by Juniper (JNPR) in 2004.
Additional disclosure: NT Advisors LLC is a consulting firm that may in the past, present or future solicit or perform consulting services for any company mentioned in this article.