Palo Alto Networks (PANW) offers little in terms of security into tonight's earnings. It's not that I don't expect the company to post a strong report, but with expectations as priced by the options market for a move greater than 10% this week, one wrong guess could be quite painful.
The smallest intraday maximum move we've experienced over the past two years is 7.6%, with five of the past six reports seeing moves of 12% or greater during the day after the report. PANW was close with a move over 10.5% five of those six times. In other words, not expecting volatility is the least secure move one can make. Although shares have surged higher the past two reports, PANW closed red for four straight reports prior to the small winning streak.
Security names have been scattered post-reports of late. Big names Symantec (SYMC) and FireEye (FEYE) have struggled while smaller names like Varonis Systems (VRNS) surged and Mimecast Ltd. (MIME) held firm.
PANW is projected to grow the top and bottom lines by 23% and 24% year over year, respectively. The company's current main driver is offering security platforms with a unique classification engine to simplify security infrastructure. Simplification equals a reduction of cost for organizations, which equals a competitive edge for all those involved. It's no wonder PANW has been able to add at least 1,000 new customers for 22 quarters in a row, with nearly 3,000 in the fourth quarter of 2017, raising the total customer base to over 42,500. Palo Alto has used a series of smaller acquisitions to bolster its top line.
The process is reminiscent to the early days of Oracle (ORCL) and Cisco Systems (CSCO) . Also, partnerships with Amazon Web Services, Alphabet (GOOGL) and VMWare (VMW) should drive PANW's move into the cloud. The partnership with VMW is the one worth noting as the combination of the two allows PANW to provide private cloud-based service to make the cloud environment more secure and efficient.
Simply put, PANW is shifting to a predominantly SaaS (software as a service) model. In fact, the company is experiencing strong adoption of its subscription services and projects them to grow over 20% per year through at least 2020. I would target a move over $150 as a breakout buy and use any post-earnings weakness as a possible entry. A move under $135 would require patience as I suspect $120 would be tested before shares move higher again.
While PANW is one of my favored names in the space, it isn't my favorite. The top two spots go to smaller names VRNS and MIME, two names focused more on internal threat prevention.
Varonis provides a software platform that protects data from insider threats and cyberattacks. The company specializes in file and email systems that hold documents, spreads, audio and video files as well as presentations. These oft-forgotten documents often contain a company's financials, strategic initiatives, intellectual property and confidential information about employees, customers and/or patients.
Varonis's land-and-expand business model offers a low average selling price (ASP), creating a high volume of growth and new customers. Cybersecurity threats are internal and external, which is why the base platform system with software expansion capabilities will act as a strong growth catalyst over the next several years. Customers can add as much or as little as they require as they become more educated on the technology.
Furthermore, the company is benefiting from EU General Data Protection Regulations that are due to come into effect shortly before June 1, 2018. Businesses of all sizes will require outside resources in order to achieve compliance to avoid large fines. Recent results from polled EU organizations show 75% expect to struggle to be ready by the deadline. Varonis' release of its Automation Engine and new threat models via DatAlert and DatAlert Analytics Rewind could not come at a better time. The biggest challenge to meet the EU requirements for companies appears to be identifying who has access to a company's data, who is accessing the information and when the data can and should be deleted. Varonis' new features fit the EU requirements by allowing customers to analyze past user and data activity, as well as automatically find and fix some of the most dangerous file security issues so that organizations are less vulnerable to attack, more compliant and consistently enforcing a least-privilege model.
Mimecast is my other top pick in the group. The company provides an innovative software platform via the cloud that protects email and URLs from cyberattacks. The company specializes in target threat protection (TTP), specifically for URLs and traditional email systems, as well as emails that are sent behind the corporate firewall. Through its cloud-based platform, Mimecast users can access services that include protecting their organization against targeted attacks, enable administrators and security specialists to monitor and report attempted attacks and outline audit and reporting. In short, the company offers a platform that can uncover email attacks that have gotten through incumbent email systems. MIME's TTP platform carries one of the lower ASPs despite being ranked as one of the best in the industry.
A common theme here has been cloud-based platforms, and those continue to lead the way in my investment thesis. Mimecast is growing 30%-plus and another cybersecurity name added over 1,000 new clients per quarter on a consistent basis. While predominantly focused on U.S. clients, the company does have an international presence and its total customer count approaches 30,000.
The names you're likely to hear most often are FireEye and Symantec. SYMC has been busy on the acquisition front and most folks know it via Norton or LifeLock. After starting November with a miss on revenue and earnings along with disappointing guidance, this has all the appeal of posting your passwords on Twitter. The chart looks broken and it's too big to be a plausible buyout candidate. Of the five security names in this article, SYMC is my least favorite.
FireEye, which I wrote about recently, continues to struggle. I still put this well above SYMC and believe the company will be bought before the end of 2018; however, my expectations have been tempered into expecting nothing more than a mid-teens purchase price. Overall, the smaller names in the space offer the big growth despite being niche products.
It's impossible to ignore cybernames when you consider stocks of breached companies on the Nasdaq underperformed other Nasdaq companies by more than 40%, according to SC Magazine, citing a study by Comparitech Analysis. There will continue to be a place for both small and big names, but I'm of the notion buying strength remains the better play.
(This commentary originally appeared on Real Money Pro at 1 p.m. ET today. Click here to learn about this dynamic market information service for active traders.)