Looking for companies with large growth opportunities is a good way to invest in technology stocks. As we've seen over the past year, investors have quickly bid up stocks that are well positioned to take advantage of companies that will be outsourcing their hardware and software to third parties. But can companies that produce "mature technology" find a way to apply their specific skills and services to newer markets?
With the emergence of the smartphone and tablet, there's a new target for hackers, thieves, and your garden-variety scoundrels to zero in on. And now that we'll be using these devices as credit cards or even virtual banks, the threat is even greater that someone will infiltrate your device. How's a consumer or company going to stop this from happening? The same way it's been done for years -- with security software and services.
What companies are best positioned?
There's no pure-play mobile-security company out there that's currently public. But in my view, the safest route is to consider the largest security-software players -- those with the financial wherewithal to develop these new mobile products and still churn out a good profit from their old PC-, server-, or network-based ones, because this trend isn't going to happen overnight. That's a good thing, though, because if mobile-security sales were imminent, valuations would be much higher.
I focused on the largest vendor in this space, Symantec (Nasdaq: SYMC ) , as a company that could allow you to capitalize on this growth. There are a few reasons I chose Symantec over its competitors.
First and foremost, I wanted a company that was focused on the mobile-market opportunity. This is clearly one area that management is focused on, as evidenced by the company's Norton Everywhere product, which aims to secure the user across all devices -- be it PC, iPad, BlackBerry, or what have you.
I also wanted a company with plenty of cash flow from its current products to support the development of its next generation. Symantec churned out $1.5 billion in free cash flow in the past four quarters, enough to give the company plenty of flexibility to continue to fund its R&D efforts.
And then there's valuation. No analysis is ever complete without considering how much you're paying and whether it's at minimum a reasonable price. Symantec looks pricey in regard to historical earnings, with a current P/E of 24, but things look less daunting if you consider the forward P/E of 12. I'd prefer looking at free cash flow to enterprise value, and I see that's closer to 9. Given the magnitude of this potential market, I'm content to buy at these prices.
That's not to say that others can't capitalize from this trend. Competitor McAfee, which was recently acquired by Intel (NYSE: INTC ) , is likely to benefit as well, as are other smaller players such as Trend Micro. In McAfee's case, Symantec management believes that the acquisition by Intel will hurt, as McAfee's sales force loses its enterprise-software focus and gains little in the way of customer breadth.
Current challenges for Symantec
Don't get me wrong -- the news isn't all positive. There are certainly competitive challenges. The biggest, in my view, is the proliferation of free security products, though many of these products expect to monetize the consumer at some point. Microsoft's (Nasdaq: MSFT ) Security Essentials is one of the only products that doesn't try to upsell. Will that be enough to steal share from a company like Symantec? You shouldn't discount the possibility, but Security Essentials will have to prove that it's effective to thwart the security companies, and that's an area that lies outside Microsoft's core strengths. It's important to note that the mobile segment is extremely fragmented among Android, Symbian, iOS, and other operating systems. It's not all about Windows the way it used to be.
Any other upside?
Even with my concerns, I remain bullish on Symantec and its ability to execute in the mobile market in the coming years. The added bonus is the potential for any of these companies to be acquired in the future. One has to look only at the recent McAfee acquisition or other acquisitions in the past year -- including Hewlett-Packard's (NYSE: HPQ ) purchase of ArcSight, Dell's (Nasdaq: DELL ) purchase of SecureWorks, and IBM's (NYSE: IBM ) purchase of BigFix -- to see that the largest technology players understand that if their products aren't secure, very little else matters. But I wouldn't advocate buying a stock on acquisition potential, and keep in mind that Symantec isn't likely to be acquired, because of a number of factors. Of course, the possibility can't be totally dismissed.
I think this is the perfect time to invest in the security industry. To find growth at reasonable valuations, you have to get in before that growth accelerates. Although that strategy often requires risk, I feel confident that this market growth has to happen.
Want to read more about Symantec? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.
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