Over the past few years, many companies and institutions have been hit by devastating data breaches. The Identity Theft Resource Center reports that as of Dec. 8, 176.3 million records have been exposed via data breaches in 2015. That's more than double the 85.6 million records exposed in 2014. As these attacks escalate, demand for robust cybersecurity services will rise. That's why research firm Markets and Markets expects the global cybersecurity market to grow from $106.3 billion this year to $170.2 billion by 2020.
Therefore, growth-oriented investors should recognize some of the top stocks in this sector. Let's discuss two cybersecurity stocks that didn't fare well in 2015 but might do better in 2016: FireEye (NASDAQ:FEYE) and CyberArk Software (NASDAQ:CYBR).
Unlike many cybersecurity firms, which identify attacks after they occur, FireEye offers threat-prevention solutions. During the third quarter, 36% of FireEye's revenue came from product sales, while the rest came from subscriptions and services. But like many of its industry peers, the company remains unprofitable in both GAAP and non-GAAP terms.
Last quarter, FireEye's total revenue rose 45% annually to $165.6 million but missed the consensus estimate by $1.5 million. FireEye also missed its own guidance on billings, then reduced its full-year billings guidance from 42%-44% growth to 32%-35% growth. That big miss spooked investors and the stock plummeted to fresh post-IPO lows. Recent secondary stock and convertible debt offerings have also raised concerns about the company's feverish cash burn rate.
To make matters worse, larger companies like Palo Alto Networks (NYSE:PANW) and Cisco (NASDAQ:CSCO) are bundling threat-prevention services with their services and products to counter FireEye's growth. Palo Alto, which shields companies with a firewall service, added new threat-detection abilities through its acquisition of Cyvera last year. Cisco gained threat-prevention abilities by buying cybersecurity firms SourceFire and ThreatGRID.
On the bright side, FireEye is still considered a "best in breed" threat-prevention firm. It was the first cybersecurity company to be certified by the U.S. Department of Homeland Security, and it signed multiple security partnerships with major tech companies over the past year. FireEye's sales growth might face headwinds, but it's unlikely to dry up anytime soon. The stock also trades at six times trailing sales, making it much cheaper than Palo Alto Networks, which trades at 16 times sales.
CyberArk goes beyond blocking or preventing external attacks by isolating internal threats that have breached a company's initial layer of security. Its software locks down the affected network or computer and prevents it from spreading to other devices and stealing more data. CyberArk mainly focuses on protecting "privileged" accounts, which are frequently exploited by hackers to gain access to sensitive data.
Last quarter, CyberArk's revenue rose 43.4% annually to $40.1 million and beat estimates by $2.95 million. Licensing revenue rose 49% annually to $24.8 million, while maintenance and services revenue rose 34% to $15.2 million. For the full year, CyberArk expects total revenues to rise 48% to 49% annually.
CyberArk finished the quarter with over 2,000 customers worldwide, including 40% of the Fortune 100 companies and 17 of the world's top 20 banks.
Unlike FireEye, CyberArk is profitable in both GAAP and non-GAAP terms. During the quarter, its non-GAAP net income rose 56% to $9.2 million, or $0.26 per share, which exceeded expectations by $0.13. GAAP net income more than doubled to $6.8 million. CyberArk can post stronger profits than its peers because it spends more conservatively. Over the past 12 months, CyberArk spent 78% of its revenue on total expenses, compared to 186% for FireEye and 114% for Palo Alto.
However, CyberArk stock isn't fundamentally cheap. It trades at 46 times forward earnings, which represents a premium for a company that is expected to grow its earnings at 26% annually over the next five years. Its P/S ratio of 8 is higher than FireEye's but cheaper than Palo Alto's.
Watch these stocks, but do your homework
Both FireEye and CyberArk are volatile stocks that queasy investors should avoid. But investors with a higher tolerance for risk can consider averaging into these stocks over time, since data breaches will likely keep rising and bolstering demand for their services. Both companies could also become lucrative buyout targets in an industry consolidation.