Big Opportunities Abound in the Cyber Security Industry for Discerning Investors

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May 14, 2014

Outlook for the Cyber Security Industry

Cyber security is emerging as a big issue for value investors to track going forward. Some investors are already taking positions in selected stocks in the industry, including potentially viable start-ups. While corporations see the growing threat of cyber-attacks as their biggest concern going forward, discerning investors could see the trend as a big opportunity to make a profit. Experts valued global spending in the cyber industry in 2011 to be about $60 billion, and it is expected to be worth $77.7 billion this year. Spending is also expected to grow at about 10 percent per year for the next 10 years, meaning IT security spending could be valued at about $700 billion by the year 2024.

Spending in the cyber security industry could be understood from two distinct perspectives. The first is the spending going into the development of cyber weapons or cyber defence, which are products and services for offensive applications used by governments and militaries. The second is the spending going into the development of cyber security products and services for the IT domain and equipment for industrial and telecoms companies. Analysts at Forester Research have identified the U.S. as the biggest spending country on cyber security products and services while spending on apps was rated the biggest of all categories.

As cyber criminals, hackers and cyber spies advance programs that bypass previous technologies, the cyber industry will continue to up its expertise to counter threats. Organizations and businesses in the public and private sectors – including banks and credit card companies – will continue to increase spending on IT security products and services to keep their operations safe from cyber-attacks that could produce significant financial losses. This is a good time for investors to look at cyber security stocks that offer significant investment potential as the cyber industry is poised for fast growth.

Cisco Systems Inc.

Cisco Systems (CSCO, Financial) is a tech giant in the networking equipment industry, but the company has tentacles spread into different areas of enterprise technology, including cyber security. The networking industry is transforming from hardware laden data networking to software defined networking (SDN). The ensuing storm will benefit some companies in the networking business while some will disappear. The management of Cisco is aware of the new trend, hence the series of acquisitions the company has embarked on recently. In July 2013, Cisco acquired Sourcefire, a pure play cyber security company, for $2.7 billion to improve its expertise in providing products like secure router hardware and integrated security services. Cisco Security has grown to become a leader in the cyber security space with its enterprise security revenue now in excess of $1 billion per year. The tech company is also ranked as No. 1 with 70% market share for secure routers and is similarly ranked in integrated security with 24% market share.

Regarding its financials, Cisco posted its 2014 second quarter financial report on Feb. 12, 2014, earnings of $0.47 per share exceeding analysts’ estimates by a penny. The quarterly revenue of $11.16 billion the company reported as against $11 billion expected by analysts dropped 7.8% in comparison with $12.10 billion for the corresponding period of 2013 fiscal year. The reported quarterly revenue of this tech giant decreased by 11% as a result of a decline in sales reported by the company’s products division.

Though all is not well with Cisco at the moment because of a decrease in enterprise spending and weakness in the emerging markets, Cisco seems better placed to benefit from long-term global demand for cyber security products and services than its competitors. Besides, Cisco has committed itself to rewarding its shareholders with 50% of its free cash flows yearly via share buyback or repurchase scheme. Additionally, there are generous quarterly dividends. In fulfilment of its promise, Cisco rewarded its shareholders in 2013 fiscal year with a combination of dividend payouts and share buybacks totalling $6.1 billion. Though its 2014 fiscal year first quarter results weren’t outstanding, the management of Cisco embarked on share buybacks worth $15 billion, leading to a decrease of 100 million units of its diluted share count. This increased shareholder value for its common stock. Without doubt, Cisco is a long-term play, and it is a stock value investors should have in their portfolios.

Intel Inc.

Intel (INTC) acquired McAfee, one of the prominent names among makers of antivirus software, for $7.7 billion in 2010, and the software security giant is now a wholly owned subsidiary of Intel. Over the years, McAfee has gained global recognition as the biggest internet security company with capacity to develop dedicated security software. Intel’s McAfee provides proven security solutions for its customers in the corporate and the consumer world.

McAfee has grown its customer base considerably and is now developing anti-virus technologies that meet the needs of its customers. It is also seeking to grow its technology via acquisition of smaller software security firms with new security technologies. McAfee acquired ValidEdge sandboxing technology from LynuxWorks in February 2013. The anti-malware firm now helps McAfee to integrate sandboxing technology into its product line for malware defence, irrespective of threat levels.

Why Invest in Intel Now?

Intel has gone through troubled times with the decline in PC markets in recent years. However, since it has been attempting to adapt to the mobile trend while also making a significant push into tablets, Intel stock looks attractive to discerning investors at the moment. Additionally, the decline in the PC market is nearing its bottom. This means that the recovery reported in its last earnings call is sustainable, though the chipmaker still needs to push itself further in all viable fronts. In addition, Intel stands to earn significant income from improved earnings McAfee will generate from deploying its technology.

Intel’s 2014 first quarter financial report exceeded analysts’ expectations marginally, but the stock has risen only by about 30.7% in the last 12 months while the Nasdaq Composite and the S&P 500 Index have risen by 36.5% and 31.3%, respectively, during the same period. This means that the chances that the price of Intel stock will rise going forward are higher. In addition, Intel has little debt, and its current P/E ratio of 14.10 is low, meaning that buying Intel at this point or adding to your position is a good investment decision in a long-term perspective

Symantec Corp

Symantec (SYMC, Financial) is a mid-cap stock. The company is known globally for its expertise in providing tested solutions in the area of security, storage and systems management to its digital customers. Symantec is also extensively focused on providing firewall security for consumer data and information. Their aim is the prevention of disruption to businesses they manage with their solutions and, hence, to keep at bay any form of cyber threat.

Symantec is a cyber security provider operating its line of business under three categories: information security – including mobile offerings and Norton anti-virus software; user productivity and protection (UPP) services – providing mail and web security offerings and back up services, and its information management services segment, providing accessibility solutions to corporate organizations.

Recently, Symantec announced an encouraging outlook for 2015 financial year and solid 2014 first quarter financials. The company expects to boost its operating margins in fiscal 2015 while it expects its revenues to stabilize. At the end of its last fiscal year, Symantec reported a net cash position of $2.0 billion after deducting $2.1 billion debt from the $4.1 billion it earned in cash and cash equivalents. Symantec’s investors earned a dividend yield of 2.9% based on $0.15 per share quarterly dividend paid out to shareholders.

Symantec may be undergoing some restructuring to make it more profitable and also position its three constituent segments for real organic growth, but this cyber security firm remains a cash cow by all standards. The company’s free cash flow yield is about 10% greater than the average for its competitors. In addition, the multiples for Symantec stock are low in comparison with any other US based software firm. Notwithstanding these positive stock evaluation parameters, the stock of Symantec isn’t being credited with a rise in its price, meaning the stock is currently trading at a discount to its true value.

Validian Corp

Validian (VLDI, Financial) is a little-known cyber security company with low market capitalization, but the stock appears to hold significant potential for discerning investors. Currently, the stock is trading at $0.05 with a market cap of $11.31 million. Investing in any stocks with very low market size like Validian carries its own risk. For example, one of the main risks associated with investing in microcap stocks like Validian involves the volumes of trades. Any size of trade in these types of stocks could result in a large percentage of impact – either negative or positive – on the price of the stock. Therefore, it is very important to do due diligence before investing your hard-earned money. That said, though Validian could appear at first instance to be one of those risky investment stocks, Validian is a stock in its own class. This is because VLDI has been posting much interesting information that any value investor might want to examine and verify.

This evolving cyber security company has pioneered the first technology in the cyber industry offering real-time prevention from cyber-attacks that occur from gaining improper access to valuable data or breaching critical applications.

Validian Corporation is a development stage tech company based in the U.S. Founded in 1989 and headquartered in Atlanta, Ga., as Sochrys.com, it changed its name in 2003 to Validian. This tech company in the development stage launched its next generation of Intrusion Prevention System, which was the first of its kind in the industry on March 13, 2014. At the launching of the cyber security application, Bruce Benn, the CEO of Validian, remarked as follows:

"Currently more than 90% of all successful cyber attacks today occur by a hacker gaining improper access to an application. This is the initial part of a cyber attack after which the hacker then steals valuable digital information. In the case of the cyber attacks against Target, reports state that the hackers gained access to a distributed application used by a company to monitor services it provided to Target. Hackers then used this access to penetrate Target as they have done to countless other corporations."

On March 18, 2014, Validian announced that the commercial roll out of its Validian-Enabled Enterprise Application would take place immediately after completing the testing and deployment of its first application in April 2014. At the event, Bruce Benn, the CEO of Validian again said:

"We are extremely excited to embark on this integration and deployment, and look forward to seeing the true value of our next generation cyber security technology come to fruition in the marketplace. Installations lead to the integration and deployment of Validian-enabled applications. The deployment of Validian-enabled applications leads to our growth via end-points and revenue, which is where we will see true increases in shareholder value."

If the words of Validian’s CEO were uttered by that of a large cap tech stock, perhaps every value investor would clearly see that the company is being vision driven. However, notwithstanding that Validian is a development stage company, it doesn’t hurt to carry out further due diligence for an opportunity to tap into it, should it appear to be truly moving forward.