The theme is pretty straightforward; hacking and cybercrime will continue to grow and so will the budgets and spending on which companies try to prevent it.
Here are some of numbers projected for 2017.
Market research firm Gartner says global spending on IT security is set to increase 4.7 percent in 2015 to $75.4 billion, and the world will spend $101 billion on information security in 2018.
The cyber security market is estimated to grow to $170 billion (USD) by 2020, at a Compound Annual Growth Rate (CAGR) of 9.8 percent from 2015 to 2020, according to a report from Markets and Markets.
The aerospace, defense, and intelligence vertical continues to be the largest contributor to cybersecurity solutions.
- The “PWC Global State of Information Security Survey 2015” found that U.S. information security budgets have grown at almost double the rate of IT budgets over the last two years.
Some industry experts believe the that number could surge beyond $100 billion by the end of 2017 as massive year-end spending measure moving through Congress http://bigstory.ap.org/article/ab9dba57a2d94a0dae12df94b59063f3/massive-year-end-spending-bill-includes-cybersecurity-act
includes a provision that will encourage companies to share cyber threat information with the government while providing them with liability protections for not acting on information received.
Indeed, while the number of complaints about online fraud have declined the dollars lost have only increased. This suggests the crimes are being committed by more sophisticated organizations and hacking higher value targets.
The total losses are expected to hit $1 billion in 2015 and approach $1.3 billion in 2016.
What we are seeing is fewer attacks on individuals but a big increase of massive data breaches across a multitude of industries.
Even as the overall revenue pie gets bigger there is cybersecurity industry needs to consolidate. Expectations are for a larger number of mergers in 2017 as firm need to scale in size of a broader suite product offerings to serve large organizations such as government agencies and multinational corporations.
A recent research note from FBR & Co. forecast a 40% increase in multi-million dollar deals of cybersecurity firms which will combine business vendors with those selling to end-users and combinations to provide end-to-end solutions.
My Sight Set on FireEye
FireEye (FEYE) is my top pick in the cybersecurity sector mainly because it is positioned to be both an acquirer and a potential takeover target. This coupled with its own internal organic 25% revenue growth makes attractive way to play the cybersecurity theme.
On last quarter the company provided 2017 revenue guidance of guidance of a 26% increase which was slightly below the prior forecasts looking for a 28% increase.
But investors shrugged that off and instead focused on the announcement it would be buying iSight in a deal valued at $200 million. Fourth quarter and full year 2016 results will be announced on February 2 and it seems the diminished expectations are now fully priced in.
Indeed, the stock has been in a miserable downtrend, tumbling some 73% since its June 2015 high and now stands at just $13 a share.
While other cyber firms such as Palo Alto Networks (PANW) and CybeArk (CYBR) have also sold off FireEye is clearly the most out of favor step-child of the group. And while the chart shows a clear downtrend the fact that shares posted a small reversal following the reduced guidance suggests it may if not found a bottom at least reached a point where there is no more selling. Every great journey begins with a single step.
To me this looks like a great opportunity to use options as low cost, low risk way to make a speculative bet that this company can use the broad and favorable industry trends which allow it to generate and grow revenues while its repairs company specific problems.
It also has sufficient cash to make further acquisitions to plug holes in its operations. If it can right the ship it should not only become profitable in its own right but with it’s mere $2.1 billion market cap would then be an attractive takeover candidate for one of the larger firms.
I want to keep this very simple, allow for sufficient time for the company to regain momentum or the possibility for a takeover event. I also want to have unlimited profit potential. For this reason I’m focused on the outright purchase of LEAP call options. Specifically;
Buy the $15 Calls with a January 2018 expiration for $4.00 per contract.
I think shares can double and get back to the $30-$35 level by the end of the year even if they only meet the now reduced guidance. That would the calls a value of over $15 for a $9 or 225% gain.
If industry consolidation picks up steam and a takeover bid comes along shares could really catch fire and move toward the $50 level.
Steve Smith is an expert options trader with 25 years experience in the markets. Steve was a seat-holder of the Chicago Board of Trade (CBOT) and the Chicago Board Option Exchange (CBOE) from 1989 – 1997. Steve is currently the editor of The Option Specialist and runs the 20K Portfolio Program which provides all types of options trades for all types of traders.
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