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Palo Alto Networks Inc (PANW), Symantec Corporation (SYMC): Solid Plays in Cybersecurity

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The cost of global cybercrime worldwide is unknown, with estimates ranging from a couple of million dollars to over $250 billion a year, or $388 billion including cleanup costs. The costs may be unknown, but what we know for sure is that the costs of cybercrime are being matched by government and corporate spending to prevent it. For instance, on average, a company will spend $9 million recovering from a cyber-attack, which could have cost them $100,000 per hour!

The figures regarding cybercrime are staggering. McAfee estimates that $1 trillion is spent globally each year in remediation efforts; cyber-attacks on critical US infrastructure projects have exploded a staggering 1,700%. To put this into proportion and give some kind of scale to the problem, it is estimated that the US Navy gets hit with up to 110,000 cyber-attacks an hour! (As an interesting side note, you know those spam emails you get every day? Globally, Botnets send out 89.5 billion spam emails everyday, 1/3 of all internet traffic.)

So, it is a big global problem.

And there are many companies that investors can buy into to benefit from this global war against cybercrime. Here are a few that you should consider:

Stopping intruders at the door

Palo Alto Networks Inc (NYSE:PANW)Stopping intruders before they get in is the main job of firewall provider Palo Alto Networks Inc (NYSE:PANW). Palo Alto is a newcomer to the market, having gone public just about a year ago. The company produces and sells firewall software that lets companies control and watch both what and who gets into their networks. The company’s software is specialiized at breaking down tactics that hackers use to avoid security software. In addition, the company is a specialist in app security, an area which is set to become a target for cybercriminals over the next few years with the explosive growth of mobile computing.

The company is growing rapidly; revenues increase 36% during the last year, and fourth-quarter sales grew 70% as the company added 1,000 more customers.

However, there are significant risks — the most obvious of which is the fact that the company is not yet profitable, but is predicted to turn a profit for the first time this year. Still, trading at 106 times forward earnings, the company looks expensive. Indeed, Palo Alto Networks Inc (NYSE:PANW)currently trades at a price-to-sales ratio of 8.2, compared to tech giant Google, which trades at a P/S ratio of 5.5.

The old-timer trying to reinvent itself

Unfortunately, Palo Alto Networks Inc (NYSE:PANW)’s growth has come at the expense of relative old timer Check Point Software Technologies Ltd. (NASDAQ:CHKP). Check Point offers less-expensive variations of firewall protection, which has drawn in customers, but at the expense of margins. The company’s operating margin fell from 57% in Q4 2012, to 55% in Q1 2013. However, Check Point has been rolling out new products that are designed to target and eliminate threats. Like Palo Alto, the company is also targeting the smartphone and tablet market.

Moreover, Check Point Software Technologies Ltd. (NASDAQ:CHKP) has around $1.3 billion in cash (more than 10% of market capitalization) and is looking for acquisitions. There are also some accounting rules that force the company to defer some revenues from its sale of new software products, but this negative effect will wear off after one year, when the deferred revenue will start hitting the books.

Check Point Software Technologies Ltd. (NASDAQ:CHKP) is well capitalized, with no debt and a current ratio just under two. That said, the company looks to be well priced, and trades at a P/S ratio of 7.5, slightly lower than that of Palo Alto Networks Inc (NYSE:PANW) above. Check Point is expected to grow earnings 25% this year, and trades at a forward P/E ratio of 13.8 – slightly lower that the average of its sector peers, which trade at an average P/E of around 17, and significantly lower than that of soon-to-be profitable Palo Alto.

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