Computer Security Investors Clutching At Straws

  • New generation firewall companies like Palo Alto Networks are hot
  • Computer security is a huge, and fast-growing business
  • Be alert for what someone can make right, as well as what can go wrong
computer_security_investors_clutching_at_straw

A decade ago I was privileged to visit an IBM (NYSE:IBM) security center in Atlanta. Originally built by Internet Security Systems, by then an IBM subsidiary, it looked like NASA mission control, with long desks and giant monitors at its front.

The concept was that rather than just responding to threats, IBM would pro-actively react to intrusions on its customers as they occurred, mitigating them in real time and maintaining constant communication.

It was great in concept, but as the Internet has become ever-more complicated, as both software and hackers have scaled, corporate and government managers want more, a lot more.

Next Generation Firewalls are Hot

Thus, computer security specialists are among the hottest stocks in today’s market. Palo Alto Networks (NYSE:PANW) is worth $15.6 billion even though sales in its recent fiscal year came in under $1 billion, and its last profit was in 2012. Fireeye (NASDAQ:FEYE) is worth almost $6 billion, even though sales for its most recent fiscal year came in at $425 million.

These are the hottest names on the computer security board, because of their unique approaches to the problem. Both these companies make what are called “next generation firewalls,” and Palo Alto now sells it as a service called Aperture. Fireeye prides itself on finding, disarming, and alerting customers to malware, most recently a program infecting Cisco (NASDAQ:CSCO) routers.

When bad guys find new ways to infect clouds, routers, devices or systems, the stock of companies like Fireeye, Palo Alto, along with older security firms like Check Point (NASDAQ:CHKP), Symante (NASDAQ:SYMC), and Fortinet (NASDAQ:FTNT) get a boost. The problem is, that while these new solutions are powerful, none are foolproof.

Software Remains Handmade, and Buggy

Part of the problem lies in the nature of software, which is still made by hand. Ruby developer Dan Meyer estimated in 2012 there are 15-50 bugs in every 1,000 lines of code. His suggestion is to keep code tiny, and to fight complexity, but when you’re building something like Apple (NASDAQ:AAPL) iOS 9 or Microsoft (NASDAQ:MSFT) Windows 10 that’s impossible.

The fact is no one has found a final answer to the problem of buggy, and thus insecure code. The new products of Palo Alto and Fireeye, and those of direct competitors like Imperva (NYSE:IMPV), Qualys (NASDAQ:QLYS), and Cyren (NASDAQ:CYRN), are good but require constant updating and replacement. This is the argument companies like Cisco and Intel, large companies with computer security divisions, tell their customers constantly, that they have the personal resources to build better security, and buy it when needed.

The Bottom Line is Distressing

But here is the bottom line. No one has come up with a foolproof computer security solution. All the companies mentioned can be made obsolete not just by something perfect, but by something better, and at any time.

If you’re going to invest in computer security, then, and it has been wildly profitable – Palo Alto is up 83% in the last year and Fortinet is up 68% -- then you need to keep an eye on the news, and maintain friendships with people in the industry, fearing now only what can go wrong, but what someone can make right.

It’s why I avoid the sector.

Copyright: stillfx / 123RF Stock Photo

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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