Today, every government, company, and individual that goes online is at risk. As of 2012, computer miscreants claimed 12 cybercrime victims per second with the average cost per victim rising by 50% for a total of $113 billion over a 12-month period. As a result, cyber security is a hot industry that is expected to grow from $95.6 billion in 2014 to over $155 billion in 2019, or a compound annual growth rate (CAGR) of 10.3%, according to a study by MarketsandMarkets. For the growth-oriented investor, we have narrowed the wide range of cyber security stocks to eight companies that seem most promising (in no particular order) and should be considered for anyone seeking exposure to this hot sector.

Symantec (SYMC)

Most people are familiar with Symantec through its ubiquitous Norton Anti-Virus program. The company specializes in firewall protection, anti-virus, storage, back up, and SSL certificate authentication for a variety of users around the world. The stock recently got sold off after its fourth quarter (2014) earnings release that saw a 6% year-over-year (YOY) decrease in revenue and lower consumer and enterprise security sales due to increasing competition, which resulted in soft guidance for the first quarter 2015. However, total license revenue rose 2% to $200 million, and information management revenue from its Veritas arm increased 1% year-over-year.  Furthermore, with a cash and cash equivalents balance of $2.874 billion as of April 2015, there is a strong possibility of Symantec buying out or merging with one of the smaller cyber security firms after its pending spin off from Veritas.

FireEye (FEYE)

FireEye specializes in malware protection and offers a signature-less attack recognition and protection platform. FireEye’s unique software prevents the entire lifecycle of advanced targeted attacks, and is designed to supplement traditional firewalls, which may be powerless to stop advanced malware. FireEye’s MVX engine is particularly known for its ability to detonate or “run” suspicious files in virtual environments to isolate threats, known as “zero-hour” attacks, which are designed to exploit unknown vulnerabilities in the network. The MVX then feeds the information gained from detecting a threat into its dynamic intelligence engine which has an ever evolving database of malware indicators of compromise (IOC), and can alert FireEye’s security teams to the affected network within mere moments. Recently, FireEye’s stock saw a rally after its first quarter 2015 earnings were released and beat the Street’s top expectations.

CyberArk Software (CYBR)

A relatively new IPO (September of last year) CyberArk focuses on security of privileged accounts management (PAM)—a subsector with little peers. Furthermore, CyberArk offers a diverse array of products that can be used separately or integrated together as part of a total PAM protection solution, as well as integrated with any of their partner companies that specialize in various aspects of cyber security, for example, McAfee for vulnerability scans. CyberArk also reported blowout first quarters numbers that showed an increase in total revenue of 89% YOY, which included an increase of $20 million (up 119%) in license revenue, as well as maintenance and professional services revenue of $12.9 million (up 56%), and net income of $4.166 million compared with a net loss of $1.356 million in the first quarter of 2014, according to CyberArk Investor Relations.

Palo Alto Networks Inc. (PANW)

Palo Alto Networks competes with Cisco Systems, Inc. (CSCO), Fortinet, Inc. (FTNT), and Juniper Networks (JNPR) in the highly competitive unified threat management (UTM) field, and specializes in advanced firewalls. Palo Alto's stock has made a remarkable run from the mid $60s to a high of $160 since May of last year, and still has a consensus rating of “Strong Buy,” by the analysts that track it. Palo Alto Networks is also expected to continue growing its earnings in 2015 at 18.9—roughly 8% higher than the industry average. Palo Alto’s strengths can be found in its increasing returns to scale, strong YOY revenue growth in both products and services across all geographic sectors, and strong R&D program.  

Proofpoint Inc. (PFPT)/ Qualys Inc. (QLYS)

Both these companies operate in the security-as-a-service field, offering cloud-based security solutions. While their respective 2015 first quarter earnings reports were less than spectacular (Proofpoint missed on bottom line, while Qualys missed on top line), Proofpoint guided FY2015 above estimates, while Qualys guided below. Therefore, Proofpoint might be a better security-as-a-service cyber security play than its competitor in the coming quarters.

Checkpoint Software Technologies Ltd. (CHKP)

Checkpoint has been around since 1993 and focuses on network security, particularly through firewalls. There is currently a consensus earnings growth in FY2015 of 6.01%, compared to the industry average of 2.9%. A recent report by Evercore Partners praised the Checkpoint’s high degree of subscription and recurring revenue, share buy-back programs, and strong R&D, but they warned against competitive pressures in the firewall industry.  

Imperva Inc. (IMPV)

According to Gartner Research, Imperva makes web application firewalls (WAF) that offers protection internal and public web applications whether they are deployed on premises or exist over a cloud network, as well as offering database auditing and file monitoring solutions. Gartner also ranked Imperva above its competitors in WAFs on security, reporting and protection criteria and praised Imperva’s market leadership in new features. Recently Imperva reported fantastic first quarter earnings of ($.26), higher than the estimate of $.38, and the company’s revenues of $44.8 million exceeded expectations. (Source).

Below is a table comparing the aforementioned companies on their key multiples. All numbers courtesy of Y-Charts.

For comparison: S&P YTD Returns = 4.08% / One-year Returns = 15.10%

 

YTD Returns

1 YR Returns

EV/Sales(TTM)

EV/Sales (Forward)

Op. Margins (TTM)

Current Ratio (Quarterly)

Debt-to-Equity Ratio (Quarterly)

Checkpoint

11.21%

36.28%

9.619

9.044

53.31%

1.743

N/A

CyberArk

59.34%

N/A (IPO)

14.88

12.68

23.43%

4.788

N/A

FireEye

33.79%

46.04%

12.78

9.697

-106%

1.851

N/A

Imperva

19.36%

180.3%

8.492

7.312

-33.6%

3.365

N/A

Palo Alto

29.34%

152.9%

17.36

14.67

-31.6%

2.075

.046

Proofpoint

20.26%

90.35%

10.45

8.757

-27.2%

1.481

.070

Qualys

6.52%

85.39%

8.627

7.331

10.25%

1.948

N/A

Symantec

26.52%

80.42%

2.356

2.444

17.66%

1.218

.132

The Bottom Line

As the prevalence of cyber threats increases, so too will the need for protection from these malicious attacks. Although the aforementioned stocks might seem incongruous to a value-oriented mandate, with strong balance sheets and amazing earnings growth potential—not to mention possibilities of mergers and acquisitions—cyber security stocks are a must-have for those investors seeking aggressive growth.  

Disclosure: Author is long FEYE.