Anyone doubting the importance of vigilant cybersecurity in
battling online crime rings and other digital deviants got a
reminder of the dangers recently, as hackers compromised store
chains and a social network.
In the highest-profile case, as many as 110 million holiday
shoppers atTarget (
) had basic personal information stolen -- including some
still-encrypted credit and debit card PIN data.
Then on New Year's Day, a forensics team confirmed that luxury
department store chain
Neiman Marcus had a data breach
reports now suggest
other retailers may also have been hit.
Just as Neiman Marcus was getting the bad news,
photo-messaging social network Snapchat was suffering its own New
Year's nightmare -- a hacker published 4.6 million stolen
usernames and phone numbers online.
Events like these not only underscore the importance of
cybersecurity -- they also tend to lift the stocks of companies
such asPalo Alto Networks (
), which provides network security infrastructure products for
companies, service providers and government entities.
Palo Alto's platform includes a next-generation firewall that
delivers application, user and content protection. In addition to
firewall appliances, the company offers centralized security
management solutions, virtual system upgrades, subscription
services such as threat detection and prevention, URL filtering,
laptop and mobile device security, and protection from
Shares of Palo Alto and other players in the computer
software/security sector have benefited from renewed awareness of
the importance of protecting computer data. That's regardless,
analysts say, of whether any one company's products and services
could have prevented big and potentially complex attacks seen in
the news lately.
Since Nov. 12, Palo Alto's stock price has risen 46%. IBD's
Computer Software-Security group is up 29% over that time.
"High-profile breaches do a lot to raise the visibility of
this sector," said Rob Owens, analyst at Pacific Crest
Securities. "These kinds of breaches give rise to the security
paradigm and the fact that corporations must do a better job of
getting the right security tools in place."
Circling The Wagons
The race to win market share in this hot sector has led to a
series of deals involving some of its leading players, including
On Jan. 7 it acquired Morta Security, a closely held startup
that claims to use "military-grade technology" to battle network
security threats. Morta was founded two years ago by former
officials at the National Security Agency. Terms of the deal were
Little public information has been provided on Morta's
technology, though Palo Alto CEO Mark McLaughlin said in a
statement that it "aligns well with our highly integrated,
automated and scalable platform approach."
Analyst Owens says Morta mainly brings "a knowledge base and
talent pool" that will help clients protect against
The Palo Alto-Morta deal followed the Jan. 2 announcement that
computer security firmFireEye (
) acquired closely held Mandiant in a deal worth $1.05
Another big transaction came in October, whenCisco Systems (
) completed its acquisition of Sourcefire for $2.7 billion.
These and other deals are meant to help vendors bolster their
positions in an increasingly competitive market expected to
undergo a major firewall refresh cycle sometime in the next 12 to
"Competition in the field is heating up with other vendors in
the network security market," Daniel Ives, analyst at FBR Capital
Markets, noted in a fiscal Q1 earnings report on Palo Alto.
The largest firm by market cap in IBD's Computer
Software-Security industry group isSymantec (
), followed by network security vendorCheck Point Software
Technologies (CHKP). Palo Alto is fifth in size.
While this battle for dollars raises the stakes for Palo Alto,
Ives is encouraged by recent developments for the company,
including "stronger-than-expected deal flow" during the first
"It appears the combination of healthy cybersecurity spending
with a good product cycle is giving the company tail winds in the
field," Ives noted.
To help build market share, Palo Alto has reorganized its
sales force and expanded its number of sales reps. The total
sales head count has risen about 50% over the last year.
Meanwhile, the company continues to develop new products. One
of them, an integrated solution for software-defined data center
infrastructure, is being developed in collaboration withVMware
(VMW), a Palo Alto, Calif.-based software firm.
"VMware's network virtualization platform will be used to
automate provisioning and distribution of Palo Alto Networks'
network security in software-defined data centers," said Hendi
Susanto, analyst at Gabelli & Co. "Palo Alto Networks is
targeting to launch the general availability of this integrated
platform in the first half of 2014."
Financially, Palo Alto has a long history of growing sales in
double or triple digits. Its bottom-line performance has been a
little spottier, however, with two EPS declines in the last five
During its fiscal first quarter, which ended in October, Palo
Alto posted earnings of 8 cents a share, excluding special items.
That was up from 4 cents the prior year and a penny above
Revenue gained 49% to $128.2 million, topping views by $7
"Product revenue of $76 million beat consensus of $72 million,
while the two services components -- maintenance and subscription
-- each grew by over 70% year-over-year," analyst Shebly Seyrafi
of FBN Securities noted in a report.
Analysts polled by Thomson Reuters expect Palo Alto's EPS for
fiscal 2014 to double from the prior year to 42 cents, then rise
79% in fiscal 2015 and 65% in fiscal 2016.