The network security industry is expected to grow up to 30% annually the next five years, and the leaders in the industry are growing sales by as much as 80% annually. Leaders most worth considering include Check Point Software, Symantec, VeriSign, and others.

By Jeff Fischer (TMF Jeff)
October 3, 2000

The Motley Fool Research Internet Report is now a monthly report that analyzes the most important industries related to the Internet -- from wireless Internet to fiber optic hardware (the upcoming issue) -- and sells for $6.25 per issue to subscribers. The latest issue analyzes the network security industry, explaining why it is important and why it should grow as much as 30% annually the next five years.

Lacking a secure network, e-commerce and other Internet applications would not occur. This fact all but guarantees the long-term success of leading network security companies. The need for network security is ingrained and will presumably be everlasting.

A handful of different online security concerns need to be addressed, and therefore a handful of different industry niche leaders exist. This diversity works in the favor of investors.

One dominant company that appears to be a strong, emerging Rule Maker is Check Point Software (Nasdaq: CHKP). Check Point has three times the market share of its nearest competitor, Computer Associates (NYSE: CA), and dominates the firewall security industry. A firewall serves to protect a site from unwanted packets of data and helps to keep crucial data safely inside the site.

Check Point Software also leads in providing Virtual Private Networks (VPN). VPNs allow a person to access a protected network via the Web just as if they were logged into the proprietary network. This is much cheaper than having a dedicated line or needing to dial into the network, and security can be just as tight.

Check Point Software recently had a gross margin of above 91%, a net profit margin of a giant 48.2%, and year-over-year sales growth of more than 80%. This $23 billion company isn't exactly cheap (at 110 times 2001 earnings estimates) when measured against past financials and expected results, but a company with such quality numbers wouldn't be.

A security leader that isn't valued as richly is Symantec (Nasdaq: SYMC). Symantec's Norton AntiVirus software is the best-selling virus protection software for personal computers. Even so, Symantec has plenty of room to grow because it trails Network Associates (Nasdaq: NETA) in providing antivirus software to enterprises for their large networks. Plus, Symantec is expanding its product line to become a full-service provider of security solutions, including VPNs.

Valued at $3 billion, Symantec is expected to grow more than 21.5% annually, yet the $44 stock trades at 15 times next fiscal year's EPS estimate.

Finally, a fast-rising network security leader is VeriSign (Nasdaq: VRSN). VeriSign is the leading provider of digital signature services that confirm the identity of persons doing business over a network. Digital signatures will soon be legally binding and VeriSign has the leading technology and authentication services. This is an industry being built on the collective trust of several transacting parties, so it may be difficult for another company to catch the first-mover, VeriSign.

VeriSign is valued at $40 billion, perhaps en route to becoming a Rule Maker. The company is expected to grow an average 51.6% annually for the next five years.

All three of these companies are worth an investor's consideration. They are addressed and analyzed much more fully, along with several other industry leaders, in the new Motley Fool Research Internet Report on network security.

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