Two Ways to Play Cyber-Security

07/24/2015 10:00 am EST

Focus: STOCKS

Jason Koepke, contributing editor to Capitalist Times, looks at cyber-security market and the increasing threats to data. The intelligence sector expert also highlights two top stocks for investors seeking broad diversification to this market.

Steven Halpern: Joining us today is Jason Koepke, contributing editor to Capitalist Times. How are you doing today, Jason?

Jason Koepke: Fine. Thanks for having me, Steven.

Steven Halpern :  As part of your professional background, you worked in the intelligence sector, so it’s not surprising that you’re particularly interested in cyber-security stocks.  Could you share your general thoughts on the sector and the outlook for investors interested in cyber-security?

Jason Koepke:  Sure. The cyber-security market has really grown due to increasingly large and concerning breaches. That’s also coincided with major moves for businesses doing online and mobile business, as well as using data from their customers.

And so, the commercial consequences of poor security practices has become a reality and easy to see through breaches at Target, Sony, and OPM (Office of Personnel Management) with the government.

And so, as the business case for this has matured, the technology side of this has also matured, with companies coming out of, kind of, the most recent tech wave with rounded-out product lines. They're not just selling single products now.

They're mature business models—and also—that are concentrated on areas of business that are now part of the normal business and tech conversations that executives are having.

So all these factors are positive signs for the cyber-security industry, and the companies that are in it, and that’s why it’s interesting not just to technical people, but also investors.  

Steven Halpern:  Now, in addition to business fundamentals which support this market, you also suggest that the cyber-security sector could become an important topic during the Presidential election cycle. Could you expand on this?

Jason Koepke:  Yeah. I mean, just from a simple passing perspective, we see that a lot of news coverage has been focused on things like the OPM data breach and the Sony hack, but there’s also real drivers behind the scenes, forcing politicians, and you know, what they’ll do isn’t always a bipartisan policy or for future.  

We have the business community, including insurance companies, and healthcare companies, very interested in eliminating the patchwork of state-by-state policies that govern how data breaches are handled.  

That includes how liability is handled, and what requirements for notifying customers exist, and instead, they want a single federal policy that’ll make it easier for them to manage those incidences.

And there’s increasingly common concerns about what countries are trying to buy what US technology and what information there is behind that. So there’s a lot of actual real politics behind the scenes that are happening that are driving cyber-security concerns and policies.

And we know that during the campaign season, that a favorite target is Washington, and so, what this policy will be and what the next steps will be taken is going to become an important campaign topic.  

It’s also worth keeping in mind that almost 14% of confirmed data breaches are in the public sector, so it’s very relevant to the politicians, as well, as well as us.  

Steven Halpern:  Now, you suggest that many investors are gravitating towards the stocks in this sector that have the flashiest products, but you also point out they may be making a mistake in terms of the right place to invest.  Would you tell us about that?

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Jason Koepke:  Well, we’ll see if they’re making a mistake or not. Generally, though, given the complexities of the technologies that we’re talking about, the complexities of the businesses that we’re talking about, and as the investors know, the complexities of the market, focusing on companies with more honed-in products and sales strategies tends to win over the medium- and long-term, and that’s what the focus here is, rather than some of the flashier companies.  

Steven Halpern:  One company you favor is Infoblox (BLOX).  What’s the attraction with this company?

Jason Koepke:  Yeah, Infoblox sells security and management products that help companies and IT teams deal with DNS.  

DNS is essentially the directory that smartphones, tablets, computers, services, and servers, anything that connects to the Internet that is uses to find each other.

And so, when that directory is well-managed, you can control who has access and what type of information goes in and out, so it’s very important for cyber-security concerns if companies—or if bad guys—are trying to get into your network and take data out.  

Why Infoblox is particularly attractive is, in part, because they control half of this existing market and as well as the fact that these type of products have a nice track record of being worthwhile to enterprises.

So the sale—or the pitch—for them is relatively easy, and with the increased focus on cyber-security matters, the ability to sell products that focus on that should be relatively easy. With that leading position and strong position within the market, Infoblox is well-positioned.

Steven Halpern:  Now, you also point to Oracle (ORCL), a very well-known software firm.  How are they involved in cyber-security?

Jason Koepke:  Yeah, well, Oracle is involved in just about everything, but we know that their bread and butter is database technology and databases are where all the data is stored.

So that’s where the bad guys are trying to get. So it’s of paramount concern that Oracle also protects the databases and the data that’s in it, which is why they sell a lot of security-oriented products.

These include things like how to encrypt that data, how to hide certain parts of that data depending on who’s looking at it, you know, which people on the IT team are looking at it, as well as manage the access and auditing of those databases that it has in it.

So it has a very comprehensive suite of cyber-security-related products and its customers know it, and, in fact, sales are increasing. Just within the last year, security product sales have increased nearly 30%.  

Steven Halpern:  Now, is it fair to say that Infoblox is more suitable for more aggressive investors, while Oracle would be best suited for more conservative investors?

Jason Koepke: Yeah, I think so.  Infoblox hasn’t demonstrated strong and consistent possibility, and instead, it’s focused on investing a lot of its money into future growth, so while it’s very strongly and well-positioned within its market, it’s still not a proven profitability machine.  

Oracle, on the other hand, has a long track record and has serious cash reserves available as it makes the transition from its existing, kind of, licensing model to more of a Cloud product and services model, which is what the outstanding question investors have regarding the company.  

Steven Halpern:  Again, our guest is Jason Koepke of Capitalist Times.  Thank you so much for your insights today.  

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