Unfortunately, cyber crime isn't going away. The number and intensity of attacks has increased in recent years, and a recent Pew survey found that the majority of experts believe it will only get worse.
Thankfully there are plenty of companies out there working to fight back against cyber crime and keep organizations and governments safe. Not all of them are publicly traded, but investors interested in the sector have plenty of choices. There are well-established firms out there that generate consistent cash flows, and then there are up-and-coming firms with less established business models but interesting growth prospects.
Below are two such stocks. They may not fit in every portfolio, but they're ones worth keeping an eye on.
Volatile and risky, but with great upside potential
FireEye (NASDAQ:FEYE) shares have been immensely volatile since the firm went public in the fall of 2013. It's not difficult to see why: FireEye's business has enjoyed booming demand in the face of rising cyber security threats, but its business model remains somewhat speculative. Despite its recent rapid growth (revenue rose 163% on an annual basis last year), it's difficult for investors to judge just how large FireEye's business could eventually become.
Rather than sell traditional products, like anti-virus software or firewalls, FireEye focuses on advanced persistent threat (APT) detection. Attackers targeting specific entities over long periods of time have wreaked havoc on major organizations in recent years -- last year's attack on Sony Pictures stands as the most significant example. Using its network of virtual machines, FireEye looks for malicious code in real time and is able to detect and stop attacks that slip past conventional security products.
But in contrast to more established firms, FireEye's products are often unaccounted for in the IT budgets of large enterprises, which can make them a tough and expensive sell. FireEye spent almost 100% of its revenue on marketing expenses last year -- and it's hard to say how many firms will eventually require FireEye's services. FireEye stock may not be suitable for every portfolio, but it's one of the more exciting firms operating in the space, and it's definitely worth keeping an eye on.
Demand continues to be impressive
Palo Alto Networks (NYSE:PANW) is, in many ways, similar to FireEye -- it's another relatively young cyber security firm experiencing rapid growth. But Palo Alto Networks' products, and its business, are a bit different than FireEye's.
Palo Alto Networks sells a platform of products. At the center lies its next-generation firewalls, which are available both physically and as virtual solutions. Next-generation firewalls are distinguished from more traditional offerings by their additional functionality, such as the ability to monitor traffic at the application level. Organizations purchase Palo Alto Networks' firewall, and then they bolster it with recurring subscriptions and maintenance support. Product revenue once composed the bulk of Palo Alto Networks' sales -- about 60% in fiscal year 2011 -- but service revenue is increasingly important (it generated nearly half of Palo Alto Network's revenue last quarter).
Palo Alto Networks offers a diverse set of a subscription services, including WildFire, a service that competes with FireEye. Although it may not be as robust as FireEye's offerings, it has experienced rapid growth in recent quarters. On the company's last earnings call, Palo Alto Network's management drew attention to WildFire noting that it had "seen an uptick in [demand for] WildFire in particular." Customers already familiar with Palo Alto Networks' other offerings may find the prospect of a paired subscription service attractive.
Like FireEye, Palo Alto Networks certainly isn't for everyone. It's not profitable, and management isn't sure it will be in the near future. But given its tremendous growth -- revenue grew 55% on an annual basis last quarter alone -- it's one cyber security stock that deserves a spot on investors' watch lists.