A Top Flight Cybersecurity Stock

07/16/2012 8:45 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

This stock started off with a head of steam and while the momentum has slowed somewhat, it still has plenty of headroom and knows how to take advantage of it says Rob DeFrancesco of Tech Stock Prospector.

It was been a winning year so far for shares of networking-security vendor Sourcefire (FIRE), which in early May hit a new peak of $59.64. The stock is still up more than 58% since the end of December, even though it has come down in the market correction.

Trading at seven times the 2012 consensus revenue estimate, the valuation remains a little stretched. Sourcefire’s fundamentals and earnings estimates are on the upswing. The 2012 consensus EPS estimate of 76 cents (up from 71 cents in April) indicates expected growth of 33%.

The company’s legacy intrusion-prevention (IPS) business is going strong, while the pipeline for the next-generation firewall (NGFW), a comprehensive solution introduced in early December, is just starting to ramp up.

With the rollout of the NGFW, Sourcefire expanded its total addressable market to $7 billion from $1.5 billion. Sourcefire CEO John Burris has said that the company would be double its current size if it could snag just 5% of the overall NGFW market.

In the meantime, Sourcefire’s core FirePOWER appliances continue to show high levels of effectiveness, with independent security research firm NSS Labs recently announcing that the 8250, 8260 and 8120 appliances protected against 99% of all cybersecurity attacks in the latest rounds of testing. The 8260 became one of the first IPS appliances tested at more than 30Gbps for real-world traffic inspection.

In the March quarter, Sourcefire reported revenue advanced 50% to $46.3 million, well above the consensus estimate of $41.6 million, driven by 63% growth in product revenue. Per-share earnings of 11 cents beat the consensus by three cents. Leverage in the model is working: Operating margin jumped to 11.3% from 5.6% in the year-ago quarter.

US commercial revenue was up 28% to $20.8 million, while international revenue surged 87% to $15.7 million. Even the US federal business showed revenue growth of 60% as Sourcefire saw earlier-than-expected funding at some government agencies. There were 79 six-figure transactions and 12 deals worth more than $500,000 each. Channel-influenced sales represented 51% of total revenue.

The interesting part of the Sourcefire story is that investors are bidding up the stock based on the company’s promising potential in NGFWs. But it’s the core IPS business putting up the latest strong growth numbers. On the earnings conference call, management said demand for the NGFW product is building, but that this segment will not be a significant revenue contributor until at least the end of the year because of the longer enterprise sales cycles.

For 2012, Sourcefire sees overall revenue growth of 25%, with the commercial and international segments expected to be up closer to 30%. The latest 2012 consensus revenue estimate shows growth expected to top 28%, so analysts are looking for the company to continue to beat guidance.

In January, Sourcefire introduced FireAMP advanced malware protection, a discovery and analysis solution that blocks malware by utilizing Big Data analytics. Recent tests have shown that endpoint protection platforms still do not protect endpoints from mass-propagated consumer threats and that their performance is even worse when faced with targeted attacks.

Designed for large enterprises, FireAMP seeks to discover, understand, and block threats missed by other security layers. A single Web-based FireAMP management console—hosted in the cloud—can support tens of thousands of users, scaling up as necessary.

FireAMP features FireCloud, a cloud-based infrastructure that includes a number of advanced detection capabilities leveraging Big Data analytics to identify and score threats that might otherwise make it through security filters. Customers can track file movement within the enterprise, allowing organizations to identify malware entry points and immediately control outbreaks by analyzing file trajectories. The FireAMP Malware Heat Chart gives users a visual image of malware penetration within an organization.

FireAMP also offers insights critical to blocking future attacks. For 2013 and 2014, Sourcefire will benefit from the NGFW business and ramping sales of the FireAmp subscription-based service. As of now, the 2013 consensus revenue estimate stands at $255 million, indicating growth of 20%. But that growth rate could prove to be conservative, especially if Sourcefire really gains traction in the NGFW market.

Management said it is already going head to head with key NGFW competitors, and winning deals. The high revenue estimate for next year is currently $274.8 million.

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