By Mary-Lynn Cesar for Kapitall
Over the last several weeks, a variety of data breaches have brought attention to cybersecurity shortcomings in a variety of places, namely the Office of Personnel Management, Ashley Madison, Jeep, and United Airlines. In addition to highlighting various network failures, these hacks have also shown the extent to which our personal information and safety are wrapped up in technology. This level of exposure, in turn, speaks to the growing demand for better cybersecurity offerings as companies that experience hacks lose significant credibility among consumers, business clientele and investors alike.
If anyone wins when high-profile hackings occur, it’s cybersecurity companies. The Wall Street Journal reports that venture capital funding for cybersecurity startups totaled $1.2 billion in the first six months of the year, which, while an impressive figure, is 14.3 percent lower than the $1.4 billion reached in the same period in 2014. However, part of the reason why last year’s figure was so high likely has to do with Target Corporation’s (TGT) December 2013 credit card hacking revelation and Neiman Marcus’s data breach that same year. Combined, both breaches affected approximately 41.1 million cardholders. Generally, funding is on the rise, up 55.6 percent from the $771 million recorded in the first half of 2013.
Meanwhile, the global cybersecurity market is growing as well. Estimates vary, but research firm Cybersecurity Ventures recently forecast in its Q3 Cybersecurity Market Report that the market will reach $77 billion this year and expand to $170 billion by 2020.
Wall Street’s appetite for investing in the multibillion-dollar cybersecurity market has also increased. In November 2014, the PureFunds ISE Cyber Security ETF (HACK) debuted. HACK tracks the ISE Cyber Security Index, which includes companies engaged in providing cybersecurity hardware, software and/or services. At the beginning of July, another cybersecurity-focused ETF hit the market: the First Trust Nasdaq CEA Cybersecurity ETF (CIBR). This ETF tracks the Nasdaq CEA Cybersecurity Index, which is comprised of companies involved with cybersecurity within the industrials and technology sectors.
Both ETFs have several holdings in common, but a closer look at the stocks reveals that only three are more profitable than their peers as indicated by higher gross, operating and pre-tax margins than the industry average on a trailing twelve-month basis. They are Cisco Systems, Inc. (CSCO), Fortinet Inc. (FTNT) and Qualys, Inc. (QLYS).
All of the aforementioned margins speak to a company’s ability, or inability, to operate efficiently. Gross margin is the percent of revenue left over after expenses are paid, operating margin is the percent of revenue that remains after paying variable production costs and pretax margin is the company’s earnings, earnings included, before taxes.
Cisco’s TTM gross margin stands at 64.73 percent versus an industry average of 59.06 percent. Fortinet’s TTM gross margin is 73.29 percent and Qualys’s is 87.35 percent while the industry average for both firms is 67.66 percent. While the industry average TTM operating margin for Cisco’s peers is 19.78 percent, Cisco’s is 23.01 percent. Fortinet and Qualys boast TTM operating margins of 5.98 percent and 10.25 percent, respectively, compared to the industry average of 1.45 percent. As for TTM pretax margin, Cisco’s is 22.69 percent versus an industry average of 16.16 percent. Fortinet’s stands at 6.07 percent and Qualys’s at 9.74 percent whereas the industry average is -9.55 percent.
Having streamlined, efficient operations is a must-have for every business, but it could prove to be especially useful in the world of cybersecurity as the product constantly has to be revamped to effectively deal with customer needs. As the Wall Street Journal notes, “Every new piece of security technology is one data breach away from being obsolete.”
Disclosure: Author owns shares of CIBR. Margin data sourced from Fidelity.