Since its IPO in early March, security software provider Sourcefire (NASDAQ:FIRE) has seen its stock plunge 27% to $13.50. Investors have reason to be insecure, given the company's weakening sales and strengthening competitors.
Sourcefire develops sophisticated software to help guard networks against threats and intrusions. The firm also manages the freely available Snort security software, which boasts a community of more than 100,000 users. Snort's success and solid reputation have been an effective way for Sourcefire to build credibility and win large accounts.
Last Friday, Sourcefire announced that Q1 revenues grew 23% to $10.5 million. Still, that figure represented a 33% drop from the previous quarter. The company suffered from a slowdown in purchases from federal government agencies, a problem that may continue into Q2. Meanwhile, Sourcefire's Q1 net loss increased 31% year over year to $2.5 million.
Bad news didn't completely douse Sourcefire, though; the company is close to resolving its patent dispute with NetClarity. There was no detail on the cost of the settlement, but it apparently won't be financially material to Sourcefire.
Investors should still be concerned with intense competition from players like IBM (NYSE:IBM) and Cisco (NASDAQ:CSCO). Check Point Software (NASDAQ:CHKP) may be the most formidable, following its acquisition of NFR Security in December. Check Point integrated NFR's technology with its other core systems, then launched its improved products into extensive channels in late April.
The shares' drop has made Sourcefire's valuation a more reasonable 3.6 times revenue. Yet it's unclear when the federal government will open its purse strings again, and the company's competitive pressures are no small threat. Foolish investors considering heating up their portfolios with Sourcefire should remember that there's still a risk they might get burned.
Further flaming Foolishness:
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 1,610 out of 28,402 rated investors in CAPS.
