Three Solid Plays in Cybersecurity

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The cost of global cybercrime worldwide is unknown, with estimates ranging from a couple of million dollars to over $250 billion a year, or $388 billion including cleanup costs. The costs may be unknown, but what we know for sure is that the costs of cybercrime are being matched by government and corporate spending to prevent it. For instance, on average, a company will spend $9 million recovering from a cyber-attack, which could have cost them $100,000 per hour! 

The figures regarding cybercrime are staggering. McAfee estimates that $1 trillion is spent globally each year in remediation efforts; cyber-attacks on critical US infrastructure projects have exploded a staggering 1,700%. To put this into proportion and give some kind of scale to the problem, it is estimated that the US Navy gets hit with up to 110,000 cyber-attacks an hour! (As an interesting side note, you know those spam emails you get every day? Globally, Botnets send out 89.5 billion spam emails everyday, 1/3 of all internet traffic.)

So, it is a big global problem. 

And there are many companies that investors can buy into to benefit from this global war against cybercrime. Here are a few that you should consider:

Stopping intruders at the door

Stopping intruders before they get in is the main job of firewall provider Palo Alto Networks (NYSE: PANW)Palo Alto is a newcomer to the market, having gone public just about a year ago. The company produces and sells firewall software that lets companies control and watch both what and who gets into their networks. The company's software is specialiized at breaking down tactics that hackers use to avoid security software. In addition, the company is a specialist in app security, an area which is set to become a target for cybercriminals over the next few years with the explosive growth of mobile computing.

The company is growing rapidly; revenues increase 36% during the last year, and fourth-quarter sales grew 70% as the company added 1,000 more customers. 

However, there are significant risks -- the most obvious of which is the fact that the company is not yet profitable, but is predicted to turn a profit for the first time this year. Still, trading at 106 times forward earnings, the company looks expensive. Indeed, Palo Alto currently trades at a price-to-sales ratio of 8.2, compared to tech giant Google, which trades at a P/S ratio of 5.5.

The old-timer trying to reinvent itself

Unfortunately, Palo Alto's growth has come at the expense of relative old timer Check Point Software (NASDAQ: CHKP). Check Point offers less-expensive variations of firewall protection, which has drawn in customers, but at the expense of margins. The company's operating margin fell from 57% in Q4 2012, to 55% in Q1 2013. However, Check Point has been rolling out new products that are designed to target and eliminate threats. Like Palo Alto, the company is also targeting the smartphone and tablet market.

Moreover, Check Point has around $1.3 billion in cash (more than 10% of market capitalization) and is looking for acquisitions. There are also some accounting rules that force the company to defer some revenues from its sale of new software products, but this negative effect will wear off after one year, when the deferred revenue will start hitting the books.

Check Point is well capitalized, with no debt and a current ratio just under two. That said, the company looks to be well priced, and trades at a P/S ratio of 7.5, slightly lower than that of Palo Alto above. Check Point is expected to grow earnings 25% this year, and trades at a forward P/E ratio of 13.8 - slightly lower that the average of its sector peers, which trade at an average P/E of around 17, and significantly lower than that of soon-to-be profitable Palo Alto.

Antivirus software

Symantec (NASDAQ: SYMC) is well known for its popular Norton line of PC security software. One of the biggest problems holding back Symantec is the company's lack of software designed to work on networks. The company offers IT companies security, but not network security solutions. While this problem has held the business back, it is not being solved: Instead management is working toward cost cutting and margin boosting strategies that will boost shareholder returns overall. In addition, the board is targeting sales growth of 5% a year, and is looking to improve both the dividend and stock repurchase programs.

Indeed, it would appear that this strategy is working, as the company is set to grow EPS and sales 100% and 16% respectively this year, beating the growth achieved over the past five years. Over the past five years the company has notched sales growth of 3.3% and EPS growth of 18.6%. Elsewhere, the company has a bundle of cash which accounts for around $6.90 per share and trades at a P/S ratio of 2.3 - much cheaper than its peers above.

Foolish summary

The market for global cybersecurity is massive, and these three companies all offer different plays to benefit from the increasing threats of cyber security. Out of all three companies, Symantec looks to be the company that is in the best position to benefit from this trend; the company has plenty of cash and is set to grow rapidly this year. Check Point and Palo Alto look to be relatively overpriced. They should still benefit from the wave of cybercrime hitting business around the globe. However, much of this growth could already be priced in.


More great investment ideas from the Motley Fool

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies. The Motley Fool owns shares of Check Point Software Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus