Net Security Stocks: A Solid Corner of Tech

Security is one of the best-positioned areas within technology for revenue growth, due to rising concerns about identity theft and other cybercrimes

By David Bogoslaw

With more and more people using the Web for business transactions and routinely typing in their credit-card digits on various sites, rising concerns about identity theft and other cybercrimes have put companies that provide Internet security products in the catbird seat.

While Symantec (SYMC) and McAfee (MFE) have hitched their wagons to Microsoft (MSFT), on hopes that the new Windows 7.0 operating system will drive sales of their security software, other companies' business models aren't tied to the fortunes of Redmond & Co.

Like VeriSign (VRSN), for example. The Mountain View (Calif.) company collects $6.87 for every new dot-com Web site it registers and $4.24 for every dot-net address it assigns under an exclusive seven-year contract with the Internet Corporation for Assigned Names & Numbers, known as ICANN, a nonprofit oversight body that coordinates domain names for the U.S. Commerce Dept.

SSL Profitability Concerns

Analysts estimate the Web infrastructure and security outfit added about 1.4 million domain names in the third quarter, which would be a 27% increase over the preceding quarter and ahead of the company's forecast of 900,000 to 1.2 million additional registrations, according to Oppenheimer (OPY) analyst Shaul Eyal in an Oct. 22 research note. That bodes well for third-quarter earnings, which the company is scheduled to report on Nov. 5. As the global economy continues to recover, "international growth could again crank up and provide a kick-start to recovery" in domain name additions, Eyal said.

While the company enjoys a virtual monopoly in the domain name business, there are still concerns about the profitability of one of its key businesses: security socket layer, or SSL, certificates, which merchants buy from the company in order to enable the encryption of sensitive information during online transactions and authenticate information about the certificate owner. While VeriSign has a 75% market share in these certificates, its average selling price has continued to decline over the past several quarters. The company attributes that to the recession, which has made cost-conscious customers favor cheaper, lower-quality certificates. The average selling price was $241 in the second quarter, vs. $253 in the third quarter of 2008.

VeriSign is expected to report earnings of 32¢ a share on Nov. 5, vs. 25¢ a year earlier, on projected revenue of $258.8 million, compared with $239.7 million in the year-ago period, VeriSign's results will follow on the heels of disappointing news from another marquee name in computer security. After the stock market closed on Oct. 29, McAfee reported earnings of 62¢ a share, excluding nonrecurring items, ahead of analysts' forecast of 61¢, McAfee's revenue jumped over 18%, to $485 million, but fell short of analysts' $486.7 million forecast. The stock finished 4.3% lower on Oct. 30.

Upgrading McAfee's Rating

In a research note on Oct. 30, analyst Joel Fishbein at Lazard Capital Markets (LAZ) said that McAfee continues to gain market share in both the enterprise and consumer security markets. McAfee's recurring revenue model and its insulation from the current spending downturn make it one of the best-positioned software companies. Fishbein reaffirmed a "buy" rating on the stock and a price target of $49. (Oppenheimer does and seeks to do business with the companies it covers in its research reports.)

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