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5 Underlying Trends Supporting Guidance Software, Inc. (GUID)

Data, data, and more data— mountains of data in ever-increasing amounts must be protected, preserved, and investigated. Guidance Software, Inc. (NASDAQ:GUID) happens to be the world’s leader in digital investigations, a multi-billion dollar market growing at 10% annually. Sony and TJ Maxx wish they had talked with Guidance before the breach, instead of after.

Occasionally, the market’s short termism’ provides an opportunity to start a new position in a great company, or add to an existing one. The recent decline in Guidance’s shares is one of those opportunities.

Guidance Software, Inc. (NASDAQ:GUID)The following 4 underlying trends will support shares of Guidance over the medium-to-long term:

1) Cyber warfare is a threat to the overall economy— an economy that creates ever increasing amounts of sensitive data. According to law, protecting this data is not an option, it’s an obligation. Large corporations can not afford to cut expenses here–penny pinching must be done elsewhere.

Recently, the media has been beating the drum (again) about cyber espionage out of China. This story is not going away anytime soon, and Guidance is a direct beneficiary. On the Q4 call, the company highlighted the “financial services” and “energy” verticals as being quite strong.

Sourcefire, Inc. (NASDAQ:FIRE) is another example of a company that has been profiting from the rising wave of Cyber warfare. While they are not in direct competition with Guidance, they do have two things in common. They both help companies minimize their cyber security risk, and not unlike Guidance  Sourcefire is also due for a pullback. According to Google Finance, Sourcefire currently has a P/E just a hair under 200, so their margin for error is quite miniscule.

2) EnCase Everywhere: Guidance says that “the campaign is working.” It’s still too early to tell, but 129 new customers using Guidance’s EnCase product in Q4 is a new high water mark. The first half of the year is historically weaker, so Q1 2013 will give investors their next taste of whether or not EnCase Everywhere is truly gaining momentum.

Guidance makes big money on the upgrade to E-Discovery or Cybersecurity; it’s worth about $125,000 to $200,000 per customer. Strong Enterprise sales are a good indicator of future revenue growth.

3) Competitive Advantage: As an open-source platform, EnCase has an edge when compared to competitor’s closed systems. Guidance’s 70%-80% market share would also indicate that they have a pretty tight grip on things.

More than 40% of Fortune 500 companies rely on the EnCase Enterprise Platform today. However, Guidance is only beginning to scratch the surface of their overall market opportunity in the USA, a country with 6,000 companies sporting over $500 million in revenues. Internationally, it’s likely that government agencies will be the early adopters.

4) Valuation: Symantec Corporation (NASDAQ:SYMC), the $15 billion security and storage behemoth, purchased Clearwell Systems, an E-Discovery platform in 2011 for $390 million, valuing the company at about 7.5 times sales. Guidance has publicly stated that all of their competitors combined have only penetrated the market by 5%-10% beyond them. Investors should watch closely to see if EnCase can maintain this type of lead against Symantec’s Clearwell.

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