Are these crime fighters the next tech superstars?
The explosive growth of the Internet has a dark side in cyber-crime -- but these companies are poised to profit from protecting their customers.
Just a few days ago, prosecutors in New York issued indictments in what is being described as the biggest computer hacking scheme in U.S. history.
Paul Fishman, the U.S. attorney for New Jersey, was quoted by Bloomberg describing a "worldwide scheme that targeted major corporate networks, stole more than 160 million credit card numbers and resulted in hundreds of millions of dollars in losses."
Some of the companies affected include 7-Eleven, French retailer Carrefour SA (CRRFY) and Nasdaq OMX Group (NDAQ). As many as 800,000 bank accounts at Citigroup (C) and PNC Financial Services Group (PNC) were targeted in the attack.
The thieves used stolen account information to withdraw money from ATMs and make credit card purchases. Three of the affected corporations sustained losses of more than $300 million, and the indictment called the losses to individual consumers "immeasurable."
The rise of the Internet over the past two decades has created enormous opportunity for the sharing of information and the creation of wealth around the world. Google, just a startup back in 1998, now boasts a market cap over $294 billion, with revenue of more than $50 billion last year. Tech billionaires like Bill Gates and Mark Zuckerberg have become household names.
But this rapid advance in technology has also given birth to a new wave of crime. An estimated 10 million people are victims of identity theft every year. Corporations and governments are forced to spend billions of dollars every year to keep proprietary information safe.
But here's the good news: There are now dozens of companies that specialize in protecting data from thieves, both on the individual and corporate level. As it turns out, this fast-growing niche has made for some great investing opportunities.
Let's take a look at some of the rising stars in this increasingly vital market:
Known for its popular Norton antivirus software, Symantec is one of the leading providers of IT security, storage, and systems management solutions. One of Symantec's key competitive advantages is its Global Intelligence Network. This network currently covers more than 200 countries and allows the company to analyze and provide security on a global scale.
Symantec also benefits from high switching costs, which can give a company a sustained competitive advantage. Once a company has chosen a security platform they rarely change it, because doing so creates downtime and inefficiencies as systems are updated and higher employee training costs.
Symantec's shares have gained over 62% over the past year, yet shares are still selling for a reasonable forward price-to-earnings (P/E) ratio of 11. Symantec only recently began paying a dividend, and although the yield is currently a paltry 0.6%, the company has announced a dividend target of 2.5%. This goal is easily within reach, as Symantec generated $1.9 billion in free cash flow during 2012.
CA Inc. (CA)
Although probably better known as a provider of IT mainframes, data centers and cloud computing, CA also offers a number of security products under the "Minder" logo. Products such as IdentityMinder, CloudMinder and DataMinder provide security solutions for both corporations and individuals.
Compared with Symantec, CA's product line is more diversified. Its core mainframe business boasts operating margins averaging 60%. It also boasts a higher dividend of 3.4%. The dividend is sustained through a payout ratio of 48% and a consistent free cash flow of roughly $1.2 billion over the past three years.
Shares are currently trading at valuations similar to those of Symantec, with a forward P/E ratio of 11, and a price-to-book (P/B) ratio of 2.5.
Investors interested in a more speculative investment may want to check out LifeLock. LifeLock is a pure-play security company that has only been publicly traded since October 2012. With a market cap of just under $1 billion, this up-and-comer has had an impressive run so far: up 33% since its IPO.
The company has been raising revenue at a steady clip, from $162 million in 2010 to $276 million in 2012. From 2011 to 2012, free cash flow nearly doubled, from $22 million to $41 million. The company has reported 32 quarters of consecutive growth in both revenue and subscribers, and the company's consumer retention rate is an impressive 87%.
However, investors' high hopes for LifeLock's continued success have driven up share prices considerably. With a forward P/E ratio of 28 and a P/B ratio over 4, it isn't cheap. It should also be noted that the company does not currently pay a dividend.
But for investors willing to shoulder the higher risk inherent in elevated prices, LifeLock's enormous growth potential and strong track record might make the higher prices worth the gamble.
Risks to consider: The technology sector is a notoriously competitive field, and sustained success within this industry requires consistent innovation and cutting-edge products. Blue-chip giants Microsoft (MSFT) and Intel (INTC) are also big players in the field of IT security, and they have billions of dollars at their disposal. Intel bought popular Internet security provider McAfee in 2011. (Microsoft owns and publishes Top Stocks, an MSN money site).
Action to take: Symantec and CA both provide solid investment opportunities for investors at today's prices, with Symantec being the slightly riskier of the two based on its shorter market and dividend history as well as its lack of diversification relative to CA. For more speculative investors, LifeLock has explosive growth potential. Yet this opportunity for big gains should be weighed against the company's short track record and lack of dividend returns.
Chad Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of INTC in one or more of its “real money” portfolios.
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