Technology

Are Cybersecurity Stocks the Next Big Buyout Targets?

Lee Jackson

Published: March 13, 2018 9:45 am

Last Updated: January 12, 2020 2:29 am

It comes as no surprise to many on Wall Street that Oclaro Inc. (NASDAQ: OCLR) was bought in a cash and stock for $1 billion by Lumentum Holdings Inc. (NASDAQ: LITE). For the past few years, many analysts predicted mergers and acquisition activity in this space and others, as the bigger companies looked to address growth and new capabilities by purchasing smaller companies.

While nobody knows for sure the next sector target, we found four companies in the cybersecurity world that are all rated Buy at Merrill Lynch and would be very logical targets. Mostly they are small in size, have specific niche products others don’t provide, and probably would be open to a buyout proposal. Even if they don’t end up in the hands of a bigger player, they are solid plays for aggressive growth accounts looking for more exposure to this fast-growing sector.

FireEye

This stock was on fire a couple of years ago but was absolutely eviscerated after numerous earnings misses. FireEye Inc. (NASDAQ: FEYE) has been mentioned over the years as a takeover target, and trading 85% below highs that were printed this time three years ago, it may indeed be on the radar.

The company provides network security solutions addressing advanced persistent threats, which traditional IT security tools like anti-virus, intrusion prevention systems, email/web gateways and firewalls, have largely failed to protect from. These solutions typically compare incoming traffic to a list of known threat signatures, failing to identify and protect against unknown targeted attacks, versus FireEye’s solution that focuses on the behavior of traffic rather than a signature.

The company posted solid fourth-quarter results and released a 2018 outlook that’s pretty much in line with Wall Street expectations. New products and new endpoint security features are positives as well.

The Merrill Lynch price target is $20, and the Wall Street consensus target is $17.93. Shares closed Monday at $17.81.

CyberArk Software

This company has less than a $2 billion market cap, which makes it a prime takeover target. CyberArk Software Ltd. (NASDAQ: CYBR) claims to be the only security company focused on eliminating the most advanced cyber threats, those that use insider privileges to attack the heart of the enterprise. The company proactively secures against cyber threats before attacks can escalate and do irreparable damage. It is estimated that at least 35% of the Fortune 100 and 17 of the world’s top 20 banks use the software to protect high-value information assets, infrastructure and applications.

CyberArk pioneered a new layer of IT security solutions that protect organizations from cyberattackers that have evaded the network perimeter. CyberArk solutions secure an organization’s critical assets, dubbed privileged accounts, which are the keys to databases, industrial control systems, servers and applications, all which house sensitive data. CyberArk software is focused on protecting these accounts, which are highly targeted in cyberattacks to disrupt networks or steal sensitive info.

Merrill Lynch has a $60 price objective, and the consensus target price is $55.11. Shares closed Monday at $51.31.

ForeScout Technologies

This is another small cap company, at $1.36 billion, that could be an easy bolt-on buy for a bigger player. ForeScout Technologies Inc. (NASDAQ: FSCT) is a pure-play leader in the high-growth security sub-segment of network access control. These products help safeguard networks by providing endpoint detection, visibility and policy control across laptops, mobile devices and the Internet of Things (IoT).

ForeScout CounterACT platform is differentiated by its agent-less and vendor-agnostic approach, and it offers Extended Modules to tightly integrate and orchestrate actions across third-party security partners.

The analysts said this when the company reported earnings:

We believe the Network Access Control market remains attractive and ForeScout’s approach addresses IoT security risks well. Broad demand across verticals and new software traction are positives; large deal lumpiness remains a risk.

The $36 Merrill Lynch price objective compares with the consensus estimate of $32.67. The stock ended trading on Monday at $35.93.

Fortinet

Many on Wall Street have stayed positive on this network security company, but it would be a larger play with almost a $10 billion market cap. Fortinet Inc. (NASDAQ: FTNT) is a pioneer in the unified threat management segment of network security solutions. Its security appliances offer the ability to run multiple security functions simultaneously, without a significant drop in throughput, enabled by Fortinet’s unique custom-ASIC architecture.

The company reported solid third-quarter results, but guidance for fourth-quarter revenue and billings came in lower than expected. In fact, the company’s management sees risk related to macro weakness in North Asia/Caribbean, soft Service Provider spending and complex sales cycles. Baird analysts had this say:

Fortinet continues to win up-market deals as evidenced by large deal wins. Management is talking more about its Fabric, multi-product deals, non-FortiGate products, and enterprise bundles. We don’t expect them to compete in every large enterprise deal but they are increasingly mentioned by large resellers.

The Merrill Lynch price target is $57. The consensus target is $50.96, and shares closed Monday at $54.68.

Cybersecurity has become one of the most sensitive issues in business and government over the past few years. Needless to say, the Russian meddling during the elections and the plethora of massive hack attacks on company databases has driven the continued urgency and need for the products provided.