This article was originally published on April 22, 2016 and updated on March 8, 2017.
Back in 2015, Steve Wozniak told Lateline that "cyber attacks and hacking" were "getting worse and worse year by year." He's right: The Identity Theft Resource Center and CyberScout reported that data breaches surged 40% to a historic high in 2016. That's why research firm Markets and Markets believes that the global cybersecurity market will grow from $106.3 billion in 2015 to $170.2 billion by 2020.
Many cybersecurity stocks have fallen from their all-time highs, presumably due to their high valuations, competitive threats, and a slowdown in enterprise spending. But as markets stabilize, investors should check out two beaten-down cybersecurity stocks -- FireEye (NASDAQ:FEYE) and CyberArk (NASDAQ:CYBR) -- which might rebound in the near future.
Unlike many other cybersecurity companies which identify threats after they strike, FireEye offers threat prevention services. The company was the first threat prevention firm to be certified by the U.S. Department of Homeland Security, and was tasked with investigating several major data breach incidents across the country. That "best in breed" reputation helped FireEye secure major partnerships with Hewlett-Packard Enterprise, Check Point Software (NASDAQ:CHKP), F5 Networks, and Visa over the past year.
FireEye's sales stayed nearly flat at $184.7 million last quarter, which was a major slowdown from 13% growth in the previous quarter and 42% growth a year earlier. Looking ahead, analysts expect FireEye's sales to rise 1% this year, compared to 15% growth in 2016.
Those numbers sound bleak, but that steep slowdown was mainly caused by the company pivoting away from on-site appliances toward cloud-based services. Those services generate more stable subscription revenues, and the company is unifying them on a single platform called Helix. If that effort pays off, its top line growth should accelerate again.
FireEye currently trades at 2.6 times trailing sales -- which is lower than the software industry average of 3.1, as well as leading firewall maker Palo Alto Networks' (NYSE:PANW) P/S ratio of 6.8. FireEye is also trading roughly nearly 50% below its IPO price of $20.
Those low valuations make FireEye a potential takeover target for any company looking to bolster its threat detection capabilities -- which could provide current investors with a nice boost. FireEye isn't profitable, but the company believes that its losses will narrow as it reduces the size of its workforce and implements other cost-cutting measures.
However, investors should note that bigger rivals like Cisco (NASDAQ:CSCO) and Palo Alto are both expanding aggressively into the threat prevention space. That aggression could force FireEye to increase its spending and buy more companies -- like its recent acquisitions of cybersecurity peers iSIGHT and Invotas -- to stay competitive.
CyberArk's software protects "privileged" accounts, which are often exploited to gain access to sensitive data. It also isolates threats once they breach a company's firewalls by locking down compromised computers or networks. Like FireEye, CyberArk has a "best in breed" reputation at what it does -- 45% of the Fortune 100 and over 25% of the Global 2000 use its services.
CyberArk's revenue rose 25% annually to $64.4 million last quarter, compared to 37% growth in the previous quarter and 42% growth a year earlier. License revenue -- which supports its maintenance and services revenue -- rose 23% to $40.8 million, compared to 34% growth in the previous quarter. Looking ahead, CyberArk expects 23%-25% revenue growth for the full year.
CyberArk's P/S ratio has declined from about 15 at the beginning of 2016 to just 7.7. That doesn't seem "cheap", but what makes CyberArk stand out is its financial discipline and focus on profitability. Its GAAP net income rose 3% annually to $10.2 million last quarter, while its non-GAAP net income grew 7% to $14.7 million. Analysts currently expect CyberArk to post 20% annual earnings growth over the next five years.
Looking ahead, CyberArk faces the same threat as FireEye -- bigger companies could bundle similar services into their hardware or software products. But like FireEye, CyberArk has been widening its moat by buying smaller security firms like Viewfinity.
High risks, high rewards
FireEye and CyberArk are both volatile stocks which aren't for risk-averse investors. But investors willing to ride out the near-term volatility could be richly rewarded over the next few years as companies boost their cybersecurity budgets to defend against hacks and data breaches.
There's also a strong possibility that both companies will be acquired by larger firms. Cisco was once rumored to be interested in FireEye, and CheckPoint reportedly held talks to buy CyberArk in the past. Therefore, I think it's a good idea to keep a small portion of your portfolio reserved for either company -- but do your own due diligence before doing so.
Leo Sun owns shares of Cisco Systems and CyberArk Software. The Motley Fool owns shares of and recommends Check Point Software Technologies, FireEye, and Visa. The Motley Fool recommends Cisco Systems, CyberArk Software, and Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.