For our edutainment today we’re sniffing out the solution to the latest teaser ad from the Oxford Club — Steve McDonald, one of their analysts, spins a long story about cybersecurity that reminds us of several other past ditigal security teasers.
Not that there’s anything wrong with that — this is, by all accounts, one of the “great” growth industries — nations, companies and individuals are continuing to be targeted by everything from everyday spam to identity theft to actual cyber “break ins” and online theft of confidential or strategic information and malicious wounding attacks to take down systems. This much is pretty clear to anyone who’s paying attention or dependent on the internet or on computers to do their business — which is almost every one. So, naturally, there are plenty of investment pundits who are on the search for companies that are good plays on this theme.
As themes go, in fact, I’d say cybersecurity is lately right up there with 3D printing, the iPhone, and Ben Bernanke’s profligacy in inspiring rafts of teaser ads… and of course, the investor enthusiasm is real, too, not just conjured up out of news — so there have been some attention-getting expensive IPOs in this space, too, like the recent successful entree of Palo Alto Networks (PANW).
McDonald describes the cybersecurity companies as being the next wave of defense contractors, with their profits likely to bloom as this cyber-war continues to grow — just like past defense contractors have profited from all the other wars our country has been involved in, both cold and hot. So that’s the basic idea, though obviously governments are far from being the only — or even the primary — customers of most cybersecurity companies.
But which particular company is he pitching? Well, I think we’re going to have to read between the lines a bit for this one. Here’s a taste of the ad:
“… a breakthrough in this war – like the airplane in WWI, or the atomic bomb in WWII – would be worth a lot of money.
“In fact, one relatively unknown company is set to deliver just such a breakthrough for the United States.
“Once you grasp how important this is to the financial future of our nation, you’ll see the enormity of the opportunity here.
“Frankly, the more you discover about this situation, the more you’ll come to realize this very well could be…
“The number one threat facing our nation today.”
He then goes on for quite a while in talking about “botnets” — these are the computer equivalent of zombie armies, computers that are compromised (usually by spam links clicked on by folks who don’t have current security software involved) and are then used, without the computer’s legitimate owner ever even knowing, to coordinate attacks on other targets. Often these are brute force distributed denial of service attacks, where the zombies just overwhelm a server and prevent it from serving up web pages, but they do all kinds of nefarious stuff, most of which I don’t understand.
Botnets are increasingly cheap and easy to create with online software kits, so the attacker might be a teenage kid who spent a few hundred bucks on the nasty software to take revenge against a wrong or smother the website of a band he doesn’t like, or a sophisticated service provider who rents out his bots to coordinate attacks against business or other rivals of his customers, or a foreign country or terrorist trying to leverage enough computing firepower to destabilize key systems. With an increasingly connected and internet-dependent world, the types of attacks that might be tried are limited only by your imagination.
That’s not to say that all of these attacks work, of course — and increased security and awareness has arguably helped to cut down somewhat on the numbers of individuals impacted by the low-end stuff or recruited unwillingly into these zombie botnets — but the bad guys are not getting any less sophisticated, and the attention paid to cybersecurity by governments and corporations is likely only to grow as both the attacks and their dependence on their networked computer systems increase.
So what, then, do we do about these botnets that can cause so many problems? Here’s some more of the ad:
“Building the Perfect Shadow War Defense Shield
“The company we’ve been telling you about recently announced a huge breakthrough in Shadow War technology.
“They have finally perfected a kind of ‘electronic umbrella.’ This system can now shield anyone – a person, a government or a corporation – from Shadow War attacks on their critical infrastructure – physical, financial or otherwise.
“This ‘shield’ is a proprietary blend of hardware, software and data collection that will move security from defensive mode to proactive attack mode. And that is a huge step forward considering, up until now, the hackers and cyber terrorists have had the upper hand. Botnets beware.
“It’s an atomic bomb-type advancement in the world of financial cyber security. It could make this company a household name just like great defense contractors of the past like Boeing, Northrup Grumman, Raytheon and others.
“We’re calling this company’s number one defensive weapon the ‘Botnet Shield.’ As I said, we believe it’s a major breakthrough in the Shadow War.
“I believe companies and governments will pay dearly to get their hands on this shield. I know I would.
“But unlike a one-time nuclear blast, the Botnet Shield is a multi-part and ongoing strategy – one that uses constant monitoring and adaptation to stay out in front of the threat.
“And in fact, that’s exactly what makes this company’s potential as an investment so attractive…
“Because as the Shadow War threat is persistent and ever-changing, so is the need for this company’s service.
“In other words, it has built in recurring revenue as it contracts to maintain its Botnet Defense Shield over companies, individuals and even governments.”
OK, so that’s a long-winded way of saying that our teaser pick has developed a new botnet defense. That’s not conclusively specific to any one company just yet, even for the Mighty, Mighty Thinkolator, but we do get just one more handy little clue:
“… one unusual company is in the process of cementing formal contracts with EVERY MEMBER of the Fortune 100. Their new defense system technology is so potent, in fact, that the company already has 98% of the Fortune 500 lined up to buy their product.”
So who are we dealing with here?
Well, this time around we are not, unfortunately, able to give a 100% certain answer — not quite enough clues. But the Thinkolator is spitting out our name and ticker and we’re assigning it a 90% probability of being dead-on. So your friendly neighborhood Stock Gumshoe is pretty sure (call it 90%) that this is Check Point Software (CHKP).
[update: check the comments below -- several folks indicate that we're sniffing up the wrong tree on this one and it's actually FTNT. Much as we hate errors, we limit self-flagellation as long as the Thinkolator's success rate remains at 99% or above.]
Check Point is indeed a cybersecurity firm — one of the biggies, with a market cap approaching $10 billion. They’re based in Israel but have a strong US presence, and they’ve been known for their firewall network security software for a long time but did indeed position themselves with a botnet-fighting product that has been evolving over the past year or so. It’s a software solution which they’re calling the “Anti-Bot Blade,” but perhaps the key to it is their ThreatCloud collaborative threat detection network that helps them identify bot traffic and other threats.
And even though I’m sort of in this business — in that Stock Gumshoe is an online endeavor, and I wouldn’t want you to face a day without our bloviating due to some attack or another — I’m afraid I can’t tell you if Check Point’s solution is going to work better than the bot-fighting and security tools from Fortinet (FTNT) or Cisco (CSCO) or Intel (INTC) or SourceFire (FIRE) or Symantec (SYMC). We do get a fair amount of certainty from the fact that although most of these large security companies undoubtedly have at least some business with pretty much everyone in the Fortune 500, Check Point is the only one I’m aware of that specifically boasts about having 98% of that group (and 100% of the Fortune 100) on their customer list.
I can also tell you that CHKP is a lot better at turning revenue into profits than the other pure-play cybersecurity companies I’ve noticed — they have profit margins of over 40%, almost twice as high as any of the other big companies I can think of in this business, partly because they have big recurring software revenues (software is one of the best margin boosting businesses in the world — it doesn’t cost any more to make a million copies of your code than it does to make a hundred). They also sell their services a little differently, it seems, focusing more on a subscription model than on a product licensing model, which might provide a lower-cost solution to start but would result in more revenue over time and a more predictable revenue stream. Of course, profit margins like that create competition pretty much all on their own — so if there’s a major worry with CHKP it’s that the folks who sell the equipment are building in more security capability (so some customers won’t feel the need to boost it with CHKP’s software offering), and CHKP is not the only company innovating in this space so they can certainly lose customers to better or cheaper products.
Will Check Point get a 25X increase in revenue as this “war” continues to heat up over the next decade, as the Oxford Club folks imply? Well, that I can’t tell you — I was a little too sleep this morning, and I drank my tea leaves by mistake. They are inexpensive — not as cheap as Symantec, their large competitor, but still pretty cheap at a forward PE of 13, particularly with their cash level, their high margins, and the expectation that they’ll continue growing earnings at a 12%+ annual clip.
Though if we add a bit of sobriety to the mix, we would also note that Louis Navellier, an unrelated teaser-meister, pitched this stock almost exactly a year ago and “guaranteed” the stock would triple by May, based on pretty much the same exact theme and big picture stuff. And, well, it didn’t — it did peak out around 15% higher for him near that May target date, but came right back down and is now trading a good 15% cheaper than it was a year ago … so you need more than just a good theme.
CHKP is not a company that has been clobbering estimates in recent quarters, they’ve been pretty “steady eddie” on that front, beating analyst estimates by one or two percent, so it’s hard to predict dramatic change for them, but they make a lot of money, their stock is priced fairly, they’re in a hot sector, and they have been growing nicely … sometimes that’s enough. Morningstar, for whatever it’s worth, pegs their fair value at $61 (the shares are around $46 as I type this).
But it’s not their money, of course, it’s yours. So what do you think? Have a reason to believe CHKP will keep on growing and profiting, or do you think competition will be too cutthroat? Have a different cybersecurity favorite? Let us know with a comment below.