WannaCry ransomware attack is a big reason why cybersecurity stocks could get hot, and CYBR is trading at a discount
Profit Confidential | June 20, 2017 | SmallCapPower: “The secret to investing is to figure out the value of something–and then pay a lot less,” says Joel Greenblatt. This quote is, bang on, exactly why we are bullish on cybersecurity stocks and CyberArk Software Ltd (NASDAQ: CYBR). Despite sitting on a tidal wave of emerging technology, CYBR stock is trading at a big discount.
No one seems to recognize this opportunity, perhaps because they underrate the importance of cybersecurity.
Cybersecurity isn’t a buzzword from Silicon Valley’s PR machine; it is the realization that warfare has extended beyond the battlefield. Digital threats are real, therefore the defenses should be as well.
This logic is why cybersecurity stocks caused a splash when they first appeared on the stock market, but companies were unwilling to pay for protection back then. Hackers barely registered on their list of security concerns, somewhere between the Tooth Fairy and Santa Claus.
As a result, companies like CyberArk would fall short of quarterly expectations; the market would punish them; a narrative would form; perceptions would harden.
It was a vicious cycle. And for a while, it looked like the sun was setting on cybersecurity stocks.
But we were not convinced.
Bullish Case for Cybersecurity Stocks
It seemed obvious to me that cybersecurity was getting more important, not less.
Think of “hacktivist” groups like Anonymous, wreaking havoc in order to watch the world burn. Or of mysterious factions like the Shadow Brokers, a band of hackers that intervened in the recent U.S. election.
Surely companies will need to defend against these threats?
We felt sure that, sooner or later, companies would be willing to pay for protection. And when they do, cybersecurity stocks will finally achieve the gains we once expected.
There’s more and more evidence that we are right. For instance, venture capital firms invested $3.1 billion in 279 cybersecurity startups last year. This return to bullishness suggests the market is shaking off earlier pessimism in preparation for another advance. (Source: “VC Firms Back Record Number of Cybersecurity Startups in 2016,” Bloomberg, February 8, 2017.)
So a reversal could be on the horizon for CYBR stock, which shouldn’t be all that surprising considering the shift in how people think about cyberattacks.
Just look at the “WannaCry” ransomware attack. It was a turning point. Not only did it affect 200,000 computers in over 150 countries, but that nightmare only ended by accident.
Someone triggered the “kill switch” by acquiring an obscure domain name. They didn’t realize what they were doing, though, and there is no guarantee we’ll get so lucky next time.
No wonder people are getting nervous.
What Sets CyberArk Apart?
But let’s get down to specifics.
If the entire cybersecurity industry is going to rise, why should you opt for CyberArk over PANW, SYMC, or FTNT?
Simple: Those companies would have you believe that hackers operate like they do in movies.
A genius kid sits in front of six screens, tapping away at his keyboard until he “breaks” through the cyber defenses of the Pentagon. Hollywood loves to portray these hackers as genius super-villains, but real-world hacking is far less glamorous.
It often takes months to prepare. The hackers test the defenses constantly and, more often than not, they find a way in through human error. People make mistakes more often than computers.
And that is what CyberArk protects against.
It guards “privileged accounts,” which are supposedly the “keys to the IT kingdom.” These accounts are access points to a company’s entire network infrastructure, and are often the entry point for hackers.
It is a unique approach to cybersecurity, but more importantly, it is sustainable. Unlike other tech firms, CyberArk does not get into an arms race with hackers, where they are trying to prove their technology is superior or that they are smarter.
It is a matter of minimizing human error, plain and simple.
What About CyberArk’s Financials?
CyberArk’s income statement is unusually strong for a small-cap stock, particularly one in the tech sector. Here are a few performance metrics to illustrate my point:
Pretty impressive, right?
To be sure, there was a deceleration in sales growth during the past two years. CYBR wasn’t exempt from the industry-wide slump detailed earlier in this report. That said, its sales growth still tops 20% consistently, which should justify some bullishness in the stock.
Apparently the market disagrees, because investors threw a hissy fit after earnings missed targets last quarter. They dragged the stock price down more than 10%, despite revenues growing 26% year-over-year and profits surging 74.4%. This is Stupidity 101. (Source: “CyberArk Announces First Quarter 2017 Results,” CyberArk Services Ltd, May 11, 2017.)
We understand dumping your shares if the company was sinking like the Titanic. That is not what happened. CyberArk came in slightly below expectations, which only means that it would take slightly longer to fulfill its valuation. That shouldn’t matter to a value investor.
What matters is that CyberArk has shown consistency in its fundamental performance. Its forward guidance is generally reliable, and its rainy day fund has $310.6 million in it.
For all these reasons and more, we believe that we’ve found something of value. And Mr. Greenblatt would be happy to know that we can pay a lot less than it’s worth.
Disclosure: The author did not receive any compensation, has no business relationship with the company, and does not own shares in the company mentioned in this article.
Neither any of the principals at Small Cap Power, nor their family members, own shares in any of the companies mentioned above.
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