WallStreetCity on Internet Security Stocks-CHKP overvalued...RNBO,CERT,ENTU,WGRD undervalued..
Featured Stocks May 16 2001 5:17PM CST
Internet Security Stocks Preventing Chaos in Cyber Space
by Chris Connor
Senior Technology Analyst, WallStreetCity.com
The Need for Security
Without a doubt the need for security is not going away. Think about it. Information is the most valuable business asset today and companies have to be willing to protect that asset. Do you think hackers care if the economy is in the doldrums? According to Meta Group, security budgets for companies are expected to increase 50 percent a year for the next 10 years. In fact, the META group predicts that almost five percent of all corporate IT spending will be focused on security by the end of 2001. At the beginning of this year, security made up around one percent of all IT budgets. Furthermore, IDC projects that the U.S. information security services market will balloon to $8.2 billion in three years from $4.3 billion currently. That said, does the Internet security industry sound like it is in trouble or does it sound like Wall Street just got carried away when it punished such top-tiered companies as RSA Security {RSAS}, Verisign {VRSN}, and Internet Security Systems {ISSX}?
The Internet Security Stocks
For a perspective of the results below, investors should note that the market (S&P 500) has a price-to-sales ratio of 4.07 and is expected to grow its earnings 13.37 percent a year over the next five years.
Company Ticker Market Value P/S Multiple 5-Year Proj. Growth
Check Point Software CHKP $12.7 B 30.0 40%
RSA Security RSAS $2.0 B 7.0 30%
Rainbow Technologies RNBO $156.4 M 1.0 31.5%
Verisign VRSN $10.28 B 14.3 50%
Entrust Technologies ENTU $365.7 M 2.4 50%
Certicom CERT $260.8 M 10.8 90%
Baltimore Technologies BALT $378.5 M 4.9 NA
Aladdin Knowledge ALDN $41.3 M 1.0 NA
ActivCard S.A. ACTI $495 M 24.1 NA
Digimarc DMRC $296.2 M 21.0 50%
hi/fn HIFN $172.0 M 3.0 32.5%
Intrusion.com INTZ $69.8 M 3.4 55%
Internet Security Systems ISSX $2.2 B 10.0 45%
Network Associates NETA $1.6 B 2.33 20%
Secure Computing SCUR $486.2 M 11.0 47.5%
Safenet SFNT $89.5 M 3.4 55.0%
SonicWALL SNWL $1.0 B 12.0 NA
Symantec SYMC $4.9 B 5.0 24.0%
V-ONE VONE $35.3 M 9.0 40%
WatchGuard Technologies WGRD $155.3 M 2.3 50%
The Most Undervalued and Overvalued Plays
Although it is one of the top Internet security companies in the world, Check Point Software is also one of the most expensive Internet security stocks by a large margin. A significant premium should be attached to the stocks of industry leaders, but CHKP is grossly overvalued. The company has a price-to-sales ratio that is roughly 7.5 times the price-to-sales ratio of the market, but has a projected earnings growth rate that is less than only three times the market's and that trails a large number of other Internet security stocks.
Based on data from the table above, the most undervalued Internet security stocks appear to be Rainbow Technologies, Entrust Technologies, Certicom, Intrusion.com, and WatchGuard Technologies. Since Intrusion.com has a market value of under $100 million, let's avoid the stock and focus on the other four. Looking at how severe these four stocks have been beaten down, speculative investors should be in hog heaven with the considerable prospects of a couple of these stocks. Read on to see which ones.
Rainbow Technologies
Rainbow Technologies, which Wall Street has the lowest expectations for out of the group, makes products that prevent the unauthorized use of software and allow secure communications over satellites, the Internet, and Virtual Private Networks (VPNs). The primary reason that Wall Street has low expectation for RNBO is that despite the significant potential of some of the company's products, RNBO has yet to really grow exceptionally. Moreover, the company reported revenue growth of only about 10 percent in its latest quarter and incurred a net loss for the first time in two years. The company cited the weak technology market in North America as the reason for the poor results. The only business segment that is showing any signs of growth is Rainbow's Secure Communications division, which has grown 62 percent over the past year. A spin-off of that division might be something for management to ponder on if the IPO market ever returns.
WatchGuard Technologies
WatchGuard Technologies takes a subscription approach to fighting cyber crimes. WGRD's LiveSecurity solution protects networks by alerting companies of security threats and viruses and continually updating security software to make sure a network can handle potential threats. In other words, WatchGuard essentially runs the securities systems for other companies' networks. Unlike Rainbow, WGRD has been able to generate explosive revenue growth. Until its most recent quarter, WatchGuard had grown its revenues sequentially for nine straight quarters at an average of 25.2% each quarter.
Certicom
Certicom is one of the preeminent players in the wireless security market. The company provides the encryption technology necessary for secure communications between cell phones, PDAs, and pagers. The crown jewel of CERT is, without question, its patented elliptic curve cryptosystem (ECC) technology. ECC fits the bill as an ascendant technology because it flourishes in small wireless devices that are hampered by low processor speed and low battery power. Unlike competing technologies, ECC eliminates the need for a cryptographic co-processor because of its substantially smaller key size. An ECC key can offer the same protection as key that is 10 times bigger. According to Certicom's web site, a 210-bit ECC key provides the same protection as a 2048-bit RSA key. The company licenses its ECC technology to such wireless giants as Palm {PALM}, Motorola {MOT}, Handspring {HAND}, and Qualcomm {QCOM}. As far as sequential revenue growth is concerned, Certicom has grown its revenues for seven straight quarters at an average of 25.7 percent each quarter. Obviously, this is one stock that should catch the attention of aggressive investors because of its crucial technology.
Entrust Technologies
Entrust Technologies provides Internet security software to e-businesses to make sure that the transactions with their customers are safe from hackers. Of course, one of the major sticking points of e-commerce is the concern over security - nobody wants have their credit card number hijacked by a hacker. Entrust has been able to enable secure e-commerce transactions so well that it was awarded Network Computing Magazines "Well-Connected Award" and Network Magazine's "Product of the Year Award" (in the Authentication and Access Control category). Besides playing the crucial role of a security guard for e-commerce, investors should note that ENTU's revenues were growing rapidly until its last quarter (11 straight quarters of sequential revenue growth at an average of 15.7 percent each quarter). Not surprisingly, Entrust's last quarter was zapped by the IT spending slowdown recently, but the company did add 98 customers during the quarter to bring its overall total number of customers to over 1,100. |
