As With Gun Stocks, So It Is With Computer Security

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Includes: CSCO, CUDA, FEYE, FTNT, IBM
by: Dana Blankenhorn

Summary

Companies working on computer security have caught fire in the last week.

Specialists like FireEye, Barracuda and Fortinet are leading the way.

Cisco and IBM shares join in the rally.

It's an old story. Every mass shooting or warning that "Obama is going to take your guns" sends the gun stocks soaring.

But the same thing is true regarding computer security. Over the last week, as the issue has hit the news again, shares in computer security stocks have generally been rallying sharply.

In just five days, shares of Fortinet (NASDAQ:FTNT) are up 7%, those of FireEye (NASDAQ:FEYE) are up 8% and those of Barracuda (NYSE:CUDA) are up a whopping 13%. Mainstream firms with heavy emphasis on security have joined in on the rally. IBM (NYSE:IBM) has risen 10% and Cisco (NASDAQ:CSCO) is up a whopping 17.4%.

This is a sharp reversal from the trend earlier in the year. Despite this week's rally, both Barracuda and FireEye are down by more than one-third on the year. FireEye reported its fourth straight loss of about 87 cents/share, about $136 million, and Barracuda, which is expected to report earnings next month, has also been bleeding red ink.

Thus, for the specialty firms, this rally is a trade. Customers are once again trusting equipment makers with computer security, and the gains here are substantiated by earnings. Cisco beat earnings estimates by 20% last week, earning $5.1 billion, 62 cents/share, on revenue of $11.9 billion for the quarter ending in January. IBM profits also impressed, with earnings of $4.5 billion, $4.53/share, despite revenue being down to $22.1 billion from $24.1 billion a year earlier.

In terms of technology, the moves by all these stocks indicate a lack of breakthroughs. Reporters continue to report flaws in existing technologies - a Fortinet back door, a critical flaw in Cisco security appliances - but a more generalized fear of technology over security issues is pushing buyers to buy, and the stocks in the area to rise.

As with the gun stocks, this is not entirely rational. Having a lot of guns in the house does not make you safer, and having a computer security appliance on your network is no guarantee of security.

But security is now a must-have feature for any IT product. Apple (NASDAQ:AAPL) is fighting the government over the encryption on its iPhones because it wants to maintain a reputation for protecting the security and privacy of its customers, not because the iPhone encryption system can't be broken.

Investors should expect more of the same as the year goes on. I would look at the news closely, seeking out claims of breakthroughs in techniques, and a testing of those claims against reality by experts. Computer security stocks are about to become more like drug stocks, because the technology world will pay handsomely to feel safe.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.