Palo Alto Networks Lights Firewall Under Wall Street


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 ( TGT ) 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 too, and 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 ( PANW ), 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 malware.

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 Palo Alto.

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 not disclosed.

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 next-generation threats.

The Palo Alto-Morta deal followed the Jan. 2 announcement that computer security firmFireEye ( FEYE ) acquired closely held Mandiant in a deal worth $1.05 billion.

Another big transaction came in October, whenCisco Systems ( CSCO ) 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 15 months.

"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 ( SYMC ), followed by network security vendorCheck Point Software Technologies (CHKP). Palo Alto is fifth in size.

Cybersecurity Spending

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 quarter.

"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 quarters.

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 consensus estimates.

Revenue gained 49% to $128.2 million, topping views by $7 million.

"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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: CSCO , FEYE , PANW , SYMC , TGT

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