If you want to know what it's like to dance with the devil, you might ask the folks at McAfee (NYSE:MFE). Scratch that, you don't need to ask, just read a few lines of the 10Q. McAfee was not only dependent on Microsoft (NASDAQ:MSFT) for some lucrative antivirus services, but it was constantly looking over its shoulder, wondering if its client might just make a foray into the antivirus software market on its own. In fact, my colleague Rich Smith attributed Symantec's (NASDAQ:SYMC) recent selloff to just such a fear following Microsoft's purchase of a small, anti-spam firm. Some readers may also remember that Microsoft acquired antivirus technology in 2003 from GeCAD.
But it doesn't look like Bill's bruisers are about to unleash their own product just yet. In fact, Microsoft's reliance on outside providers is the big bummer for McAfee today. Trend Micro (NASDAQ:TMIC) has poached the virus-sniffing contract for Microsoft's Hotmail. Investors reacted predictably to the news, punishing McAfee and sending Trend Micro way up. Whether the reaction is rational will depend on further news. No details were provided by which we might judge the real effects of the contract on either company. McAfee's past filings don't break out what the Microsoft relationship meant to the top or bottom lines, so all the price action now is just guesswork.
What's a Fool to do? In my opinion, the whole virus-protection biz looks a bit investor-unfriendly. Trend Micro's ratios are way out of whack when compared to its competitors. (P/E at 60? Price-to-sale at 12? Ouch!) And though the price-to-free cash flow picture at McAfee and Symantec is less gruesome than either firm's P/E, Symantec's share dilution will make your hair stand on end. McAfee isn't exactly odor-free either, involved as it is with pending SEC and Department of Justice accounting inquiries.
The final nail in the collective coffin is the direction of the computer industry toward all-encompassing security strategies. Are infrastructure safeguards by core data-movers such as Cisco Systems (NASDAQ:CSCO) and Juniper Networks (NASDAQ:JNPR) going to make traditional antivirus software solutions obsolete? Will Windows finally come out with its own solution? Those are major risks, and these stocks don't look valued to deliver appropriate returns for investors' trouble.
For related Foolishness:
- When Microsoft goes "Boo!," software investors need a change of shorts.
- Take a two-bit gander at Redmond's new little giant.
- Given government-sponsored viruses, who's protecting whom, and from what?
Seth Jayson is saddened that he's never contracted a computer virus. At the time of publication, he had positions in no firm mentioned, either. View his stock holdings and Fool profile here. Fool rules are here.
