After the Bloodbath, Which Cybersecurity Stock Is Acquired First?


Caught up in the high multiple downdraft, the top cybersecurity stocks have been beaten down along with other high-beta momentum stocks of purveyors of burritos, specialty pharmaceuticals and electric cars. The one problem is that demand for cybersecurity software continues to go through the roof, and the demand for some of other companies’ products is somewhat more tepid.

With almost every corporation, government agency, municipality and every other conceivable organization looking to protect their security and data, the need is escalating, and so is the demand. We looked at the three of the top stocks, two of which posted either less than stellar earnings or gave disappointing guidance. The other one blew out numbers and upped guidance and was still taken to the woodshed.

With the stock just getting eviscerated, they may be starting to look awfully tempting to large companies with ancillary security business, or security companies that are looking to expand their product offerings. We screened the Merrill Lynch research universe for their current ratings on the top stocks that got hit the hardest.

CyberArk Software

This company had a red-hot IPO last year and has been mauled, down 30% in the past two weeks. CyberArk Software Ltd. (NASDAQ: CYBR) claims to be the only security company focused on eliminating the most advanced cyber threats, those that use insider privileges to attack the heart of the enterprise. The company proactively secures against cyber threats before attacks can escalate and do irreparable damage. Some 35% of the Fortune 100 and 17 of the world’s top 20 banks use the software to protect high-value information assets, infrastructure and applications.

CyberArk crushed earnings expectations recently and posted strong forward guidance. In fact, the company beat on top and bottom lines and provided above-consensus guidance for both revenue and earnings for the fourth quarter. While some, including CNBC’s Jim Cramer, have lamented the high price-to-earnings multiple, it should be noted that CyberArk is one of the few of the smaller top companies that actually makes money. It could be a solid fit for Checkpoint, which may have a need to add privileged account security solution to secure, manage and monitor privileged account access and activities.

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Merrill Lynch recently downgraded the stock to a Neutral rating and lowered the price target to $48. The Thomson/First Call consensus price target is much higher at $63.475. Shares closed Tuesday at $40.50, down almost 10%.

This company has been absolutely crushed and could offer massive upside. The stock has tumbled almost 40% since June. FireEye Inc. (NASDAQ: FEYE) has been mentioned recently as a takeover target, with numerous big tech companies listed as possible suitors. It announced earlier this year that it will be working with Visa to help the credit card giant develop products for merchants and credit card issuers to defend against large-scale attacks on payment data. FireEye is in an arena where it may drive the next big wave of cybersecurity technology.

FireEye invented a purpose-built, virtual machine-based security platform that provides real-time threat protection to enterprises and governments worldwide against the next generation of cyber attacks. These highly sophisticated cyber attacks easily circumvent traditional signature-based defenses, such as next-generation firewalls, IPS, anti-virus and gateways. The FireEye Threat Prevention Platform provides real-time, dynamic threat protection without the use of signatures to protect an organization across the primary threat vectors and across the different stages of an attack life cycle. The core of the FireEye platform is a virtual execution engine, complemented by dynamic threat intelligence, to identify and block cyber attacks in real time. FireEye has over 3,400 customers across 67 countries, including over 250 of the Fortune 500.

After reporting record earnings that had revenue up 45% year over year, and billings that were up 28%, the stock was absolutely killed and is now trading back to just above the IPO price of $20. Investors should also note that top executives of the company, including the CEO and the CFO, bought stock right after it got hit. Cisco was rumored to be looking at the company back in the spring, and the huge sell-off may renew some interest.

The Merrill Lynch rating was dropped to Neutral and the price target price is $30. The consensus target is $33.86. Shares closed Tuesday at $23.24.

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This company was rewarded for good earnings recently by getting absolutely hammered. Fortinet Inc. (NASDAQ: FTNT) is well liked on Wall Street, and the company’s fast, secure and global cybersecurity solutions provide broad, high-performance protection against dynamic security threats while simplifying the IT infrastructure. They are strengthened by the industry’s highest level of threat research, intelligence and analytics. Unlike pure-play network security providers, Fortinet can solve organizations’ most important security challenges, whether in networked, application or mobile environments, be it virtualized/cloud or physical.

Fortinet shareholders were horrified recently as the company posted outstanding earnings on the top and bottom line, but it was taken to the woodshed after providing forward guidance that didn’t sit well with many of the analysts covering the stock. Billings growth grew a staggering 40.5% year over year, driven by strong demand for high-end appliances, subscriptions and new product offerings.

Merrill Lynch remains very positive on Fortinet and notes that while the fourth-quarter guidance was less than expected, some of that can be attributed to weak Canadian and emerging markets. The firm thinks Fortinet can continue to outgrow the market in the foreseeable future due to salesforce productivity gains and product refreshes. It’s possible a service-oriented company like IBM or Hewlett Packard Enterprise would have an interest in Fortinet.

Merrill Lynch has kept the firm’s Buy rating and has a price target of $51. The consensus target is $48.12. Shares closed Tuesday at $33.38.

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The exodus of fast-money traders is no doubt a big reason for the collapse in the stocks recently. But make no mistake, the need for the product is gigantic, and while the rerating of the companies may be ongoing, the next big corporate or government hack will refocus attention squarely back on them all.

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