How to Invest in Hacking

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It seems hackers are everywhere these days, with the recent infiltration of only the most recent example in a series of attacks against businesses, websites, and the government. But within the chaos there is a possible investment: Buy the companies that protect others from hackers. So which cybersecurity companies should you choose? The first that may come to mind is the one many of us have to update every time we turn on a PC: McAfee.

Check yourself
Unfortunately, you can't invest directly in McAfee anymore, as Intel (Nasdaq: INTC  ) bought the company in August 2010. But that doesn't mean McAfee hasn't been busy. The company has decided to ride the growth of social media with the creation of a Facebook application that gives users more control over who sees their photos. There's also a McAfee security app for your phone that gives you antivirus and Web protection, a clear sign that the company isn't afraid to expand beyond the PC market.

The beneficiary of these new McAfee products is, of course, Intel. In its most recent earnings report, the company noted that its Software and Services Operating segments, of which McAfee is a part, saw revenue increase from $511 million to $586 million year over year. This $75 million growth came alongside a $28 million boost in operating income, an area in which the company had lost $14 million last year. Intel attributed both instances of improvement to higher revenue from McAfee. Of course, McAfee isn't the only major cybersecurity company.

Before you wreck yourself
The other giant in the space is Symantec (Nasdaq: SYMC  ) , which most of us know from its Norton Antivirus software. Like McAfee, the company has been no slouch in keeping its products up to date with new developments in social networking or PCs. In fact, a few days ago, Symantec announced that its newest versions of Norton security software will be compatible with Windows 8, as well as capable of protecting users from attacks through social networks.

Symantec controls a little over 16% of the North American antivirus market but has less than 10% of the worldwide market. Before the company can increase any sort of international market presence, it needs to get its house in order. At the end of July, Symantec hired Steve Bennett as CEO, a move that shareholders hope will help reverse the company's run of bad luck. The misfortune is evident in the company's most recent earnings report, in which revenue, operating income, earnings, profit margin, and plenty of other financial metrics declined. We'll see whether Symantec is better at stopping hackers than it is at making money.

Last but not least
While McAfee and Symantec are two of the major players in cybersecurity (along with Microsoft, which creates the security software for its own products), let's take a look at a smaller company within the sector. Check Point Software Technologies (Nasdaq: CHKP  ) focuses less on personal protection and more on IT security for companies. In fact, as fellow fool Dan Dzombak points out in a recent article, 98% of all Fortune 500 companies use Check Point for their security purposes.  

Check Point's wide usage by major companies certainly hasn't hurt its bottom line. Last quarter, the company reported a 9% revenue increase, as well as a 20% boost in operating income -- which is why Check Point enjoys an impressive 55% operating margin. But with a P/E of 17.33 (just a bit over the industry average of 16.77), investors may want to wait until Check Point's a bit cheaper to buy in.

As the world becomes more connected via the Internet, cybersecurity will become an even bigger priority -- and that means bigger profits for investors as long as they know the right places to look. We recently highlighted Intel's opportunities in this booming space in our new premium research report on the semiconductor powerhouse. Get started today.

Fool contributor Mark Reeth owns none of the stocks mentioned above, but he does keep a lot of security programs on his computer. Follow him on Twitter, @ChristmasReeth.

The Motley Fool owns shares of Microsoft, Facebook, Check Point Software Technologies, and Intel. Motley Fool newsletter services have recommended buying shares of Check Point Software Technologies, Facebook, Intel, and Microsoft, as well as creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On September 16, 2012, at 3:40 PM, EducatedInvestor wrote:

    Balanced article, decently done.

    As the article implies, at the current price levels (as of release of this article), NONE of the companies mentioned are a "buy". Intel is struggling with market impacts on PC sales (among other things) and both Checkpoint and Symantec are clearly overvalued. In particular Symantec is still a real mess internally, was trading 30% lower just a few months ago and has gained recently for no substantive reason, just news of a CEO change (the 3rd CEO in 5 years). The internal problems and execution issues remain and investors should be leery until proved otherwise over a distance ahead. Having said that, any of theses companies might be worth a long term view (years), but only after a healthy re-tracement occurs back to reasonable valuations before entering. Of course, this assumes the global economy is going to become more healthy over that same time period, which is still in question.

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