Cyber security picks

September 22, 2015 02:21 PM

The world of cyber security has grown as high visibility attacks captivate media attention whether they surround companies in the private sector (like Sony, Target and JP Morgan) or in the public sector where governments are on the verge of “virtual wars.” Cyber security is now, and will be for a long time, at the forefront of institutional concerns across sectors.  

The private sector has done its part to try to monetize this new segment with more than a dozen public companies focusing almost exclusively on cyber security. For investors, the choices have become overwhelming. There are two companies, however, that stand out.

Vasco Data Security International (vdsi)

VDSI lives in the enterprise security products, software and services realm of technology but more specifically, with respect to cyber security, in the authentication and e-signature solutions segment. It focuses heavily on banks, which generate 80% of the firm’s revenue. The company has immensely strong fundamentals. The stock was up more than 150% for the 12-month period ending June 15, but since then has fallen nearly 40%. 

VDSI’s fundamentals look solid with revenue, operating margins, net income and free cash flow all growing. This company is killing it on all fronts and is turning a profit as it grows, while its competitors continue to show losses. “Measuring growth” plots revenue (TTM in the blue bars) and net income (TTM in the orange line). Note that both measures are at all-time highs.

But VDSI has some big doubters. Incredibly, the company shows more than 51% short interest as of Aug. 11. And, just to make it more confusing, 26% of the stock is owned by institutions. That’s nearly 80% of the float owned by parties with aggressively dissenting views. It’s a fascinating tug-of-war, with the bearish thesis sitting squarely on the reality that banks tend to sign enormous contracts but have little loyalty, often switching from vendor to vendor and essentially destroying their partners in one fell swoop.

VASCO generates 70% of its revenue from hardware in an industry that is focused on software solutions.

CyberArk Software (CYBR)

CYBR went public in September of 2014 at $16 and is now trading nearly 300% higher. The company claims 40% of the Fortune 100 as clients and has grown massively while generating a profit. For a company this young to grow this fast and make profit is unique. The compelling differentiator is its focus on protecting companies from breaches that have already made their way inside the network perimeter and gained insider privileges. Many believe CYBR to be the only company that has figured out cyber security surrounding insider privileges.

Even though it’s a new face and relatively small compared with its competitors, its revenue, operating margins, net income and research and development all are increasing. Revenue has grown 67% year-over-year and stands at $119 million in the trailing 12 months. Its revenue and net profit is plotted in “Measuring growth,” which is at all-time highs.The risks for CYBR surround valuation and competition. With respect to valuation, CYBR boasts a price to sales of 16:1. Compare that valuation with VASCO’s price to sales of 4:1.

About the Author

Ophir Gottlieb is the co-founder/CEO of Capital Market Laboratories ( He is a former option market maker and the co-inventor of the Forensic Alpha Model and Governance Risk Models used by asset managers worldwide with over $1T AUM. Gottlieb’s mathematics and machine learning background stem from his graduate work at Stanford University. @ophirgottlieb