This week Barrons Article on SDTI:The Web [has] triggered a tremendous amount of new spending," adds Kris Tuttle, managing director of software research at Soundview Technology Group.
Why? There's real money to be made: Around $426 billion in sales will originate on the Internet by 2002, according to the International Data Corporation. And regardless of how many personal computers are sold, Web-based business is booming.
That's where some niche software companies come in. Among them are names that played in the Y2K arena, like Compuware, and newer companies that supply security programs for e-commerce. Those include Check Point Systems, BEA Systems and Security Dynamics.
Compuware, which Tuttle calls "a gorilla" (its market capitalization is nearly $10 billion), makes software for building and testing applications -- including the Internet. "They're moving…into strategic areas, and brought the notion of testing up to the forefront," says Farley. "Meanwhile the company continues to grow [by] 45-50%."
And at its current price of 25 7/16, it's more than a third off its 52-week high of 39 1/16. Its P/E of 22 times projected 1999 earnings of $1.15 also makes it reasonable, compared with its expected growth rates for 1999 (34%) and over the long term (35%), according to First Call.
(Readers should note, however, that there's been some heavy insider selling at Compuware. From September 1998 to January 1999, six high-level executives, including chief operating officer Joseph Nathan, dumped a total of 631,050 shares. Also, concerns persist about shrinking revenues from some outsourcing contracts.)
Another area set to explode is Internet security. The firewall market should grow by more than 50% in 1999 to reach an estimated $953 million, says IDC. Likewise, the virtual private network (VPN) market is expected to more than double in 1999, to $425 million.
That's why Broadvision, Clarify and Check Point Systems on the security side are going to do well, says Tuttle. "And Security Dynamics, which hasn't done well because of product transitions, should start to do better," he adds.
Check Point, with a market capitalization of about $1.3 billion, makes firewalls that limit user access and virtual private networks, which also help filter out unwanted users. It also has products that help manage traffic over networks.
With strong sales through Sun Microsystems, Nokia, Northern Telecom/Bay Networks and IBM, and with around 20 agreements with service providers including MCI/WorldCom, AT&T, Sprint and British Telecom, Check Point appears to be well- established.
A small-cap company, Security Dynamics, with a market capitalization of around $700 million, makes products to protect and manage access to computer-based networks, like cards and tokens. It, too, has some notable alliances, with the likes of IBM, MCI WorldCom, Sprint and America Online.
And with prices that are well off their highs, these stocks look even more attractive to their fans. Check Point, BEA Systems and Security Dynamics, for example, are between a third and 40 percent off their 52-week highs. They're also trading at big discounts to their growth rates.
Take CheckPoint. At 40 5/16, it's changing hands at 20x expected 1999 earnings of around $2.00, in line with its current growth rate but well below its projected long-term growth rate of 36%, according to First Call. Analysts Gibbs R. Moody and Sarah E. Mattson of Warburg Dillon Reed have a price target of $60 on the stock.
With its current price of 16 1/2, Security Dynamics has a low P/E of 24x estimated 1999 earnings of 68 cents, and 18x the 92 cents a share analysts expect it to earn in 2000 -- a deep discount to its growth rate of 45% for 1999 and 41% over the long term. |
