McAfee executive Mike Carpenter hasn't had much downtime at work since Jan. 12, when Web-search giant Google said its computers were hacked in China. "I've been in meetings from morning till night without breaks" since the news broke, says Carpenter, senior vice-president for McAfee's public sector business. "There's been tremendous interest" in the company's software, designed to protect computers from malware and security breaches.
The cyberattack against Google isn't the only source of interest in security software and the vendors that sell it. Shares of McAfee (MFE), Symantec (SYMC), and Checkpoint Software Technologies (CHKP) are getting a general lift amid signs that spending on information technology is rebounding after last year's slump. Investors expect businesses and government agencies to boost buying of computers and software.
One area that could benefit most is security software designed to guard machines and networks against cyber intruders. "Security will be a very good sector for 2010," says Daniel Ives, an analyst at FBR Capital Markets (FBCM). "Investors are viewing it as a positive investment theme for 2010 with Symantec, McAfee, and Checkpoint being front and center."
On Jan. 15, Symantec stock closed at 18.85, its highest since early October 2008. The same day, Checkpoint rose to 34.41, capping a 64% increase over the past year. (During the same period, the Nasdaq Composite Index climbed 51%.) McAfee stock has climbed 40% in the past 12 months and on Jan. 15 slipped 29¢, to 40.98.
"We have a target on our back"
Information technology spending may increase 3.2%, to $1.5 trillion, in 2010, after declining by nearly as much last year, according to market researcher IDC. Worldwide spending on security products and services is expected to grow by more than 9% annually from 2008 to 2013, to $37.8 billion, IDC says.
Government spending on computer security has been an area of particular strength for vendors. FBR's Ives expects "a significant increase in cybersecurity spending" by the government. "It's a multibillion-dollar market opportunity that's poised to show significant growth. We have a target on our back. It's a cyber war and we're fighting it. In order to fight it, you need to spend more money, and some of the core beneficiaries of that trend will be the security software companies. The engines are starting to roar."
The federal government's Comprehensive National Cybersecurity Initiative was begun under the George W. Bush Administration and continued by President Barack Obama. It will allocate billions of dollars a year to technology companies for security products and spans multiple government agencies, says McAfee's Carpenter. The Defense Dept. has also been a big buyer of security technology; McAfee on Nov. 10 announced a $9.7 million deal to supply the Air Force with security software consulting via a contract with Northrop Grumman (NOC).
On Dec. 22, the Obama Administration announced that Howard Schmidt, a former executive at Microsoft (MSFT) and eBay (EBAY), would become the government's next cybersecurity coordinator, a post that has been vacant since August. Vendors see the appointment as a sign that the government is ready to open up spending as Schmidt ends his preparation period and takes on the job in earnest this month. "I'm seeing a very large rise in interest in spending on computer security by the government," says David Perry, global director of malware education at security software maker Trend Micro.
IPOs rolling out in security
In the coming weeks investors will gain insight as to whether and for how long the security software gains may last, as tech companies report earnings and issue forecasts for coming quarters. Symantec's sales are expected to rebound in fiscal 2011, which begins in April, after declines in the current fiscal year. Symantec Chief Executive Enrique Salem has been focusing the company on its core security and data backup businesses while divesting or deemphasizing ancillary software products since he took over as CEO in April 2009. "You can't do 10 things well," Salem said in a recent interview.
McAfee's fourth quarter sales, due to be reported Feb. 11, are expected to increase 21% to $514.3 million, the fastest pace in three quarters. Earnings per share are expected to reach 64¢, vs. 53¢ a year earlier.
The growth potential has companies again looking to public markets. Shares of software provider Fortinet (FTNT) have gained 18% since their Nov. 18 IPO, closing on Jan. 15 at 19.63. Sophos, a U.K.-based vendor of security software that reported at 27% increase in fiscal 2009 sales to $271 million, is preparing to file for an initial public offering on the Nasdaq Composite Index within two months, according to a person familiar with the matter.
Sophos filed to go public in 2007 but withdrew its registration the following year, citing weakness in the market.
Still, there are skeptics. UBS (UBS) managing director Brent Thill, in a Nov. 12 report, pointed out that security software stocks tend to perform worse during economic recoveries than they do during recessions. His point is that when companies trim IT budgets and hold off on PC purchases—as was the case in recent years—they're less likely to cut spending on security software designed to keep aging machines safe from threats. What's more, security companies will face new competition from Microsoft this year because the company has included free antivirus software in its new Windows 7 operating system.
For now, though, shares of security vendors are getting a lift. Carpenter's meeting agenda is full.