Humans have always had the need for security. In the earliest days of civilization, early humans would bury their valuable possessions, or hide them in caves. As time went on, skilled trades people crafted vaults and safes to store the valuables of those who could afford to pay them. CyberArk Software is a digital security firm to store your values.
With the internet, however, came the need for an entirely new kind of protection and security. The digital exchange and storage of information gave hackers the opportunity to steal that information.
And with the increased volume of transactions and data stored online, the need for security has increased exponentially. Regular readers of the Financial Markets Wizard blog and options trading newsletter will be well aware of the many companies that have been created to serve this need. Indeed, subscribers to the options trading services we provide have made several profitable trades on companies in this industry.
That is why the digital security firm CyberArk Software (CYBR) is worth some attention. It has made a strong start to life as a publicly traded company, with the share price doubling from its initial trading range of $30 to the most recent high of $70.48.
So are there more opportunities for the share price of CyberArk Software to continue to grow in the near future?
Understanding the Business
In medieval times, the method of defending against invading armies was simple. Wealthy castle owners would put their assets behind high, impenetrable walls and pull up the drawbridge before fighting off the attackers. Most digital security works off exactly the same principle.
Traditional firewalls and anti-virus software places the crucial information and assets of a person or company behind digital “walls” in an attempt to keep out intruders. But the higher the walls are built, the better the attackers become at climbing over them, meaning that software and information needs to be upgraded rapidly to stay ahead of the attackers.
CyberArk Software (CYBR) provides this traditional form of protection, but with one important added extra. The Israeli based company also researches, designs and sells software that protects from threats inside the digital walls of a network.
The reason for this is twofold. First, it allows companies whose defenses have been breached to lock down their systems and prevent the attacker from moving around freely and stealing more. Secondly, it protects against internal threats to the organization, such as an employee who might sell passwords or access illegally to malicious third parties.
Research shows that data theft and information security breaches are far more common from inside organizations than from outside them, often from contractors or employees who have access to the system from the inside. To go back to the original example, this would be like people inside the castle putting the drawbridge down and helping the attackers get inside.
Metrics and Measures
This innovative and novel approach to securing digital networks delivered impressive results for the company in their latest quarterly earnings.
For options trading services, the really interesting number was the headline revenue increase in the fourth quarter of 81%, which equated to over $36 million. Of that revenue figure, recurring license revenue was over $24 million, which was almost double that of the previous quarter.
Recurring revenue is the best kind of revenue for a company to earn, as it means that customers are making repeat purchases and providing earnings stability.
The quarterly net income of CyberArk Software (CYBR) was also impressive, with $6.7 million earned after costs were taken out of revenue. This represented an increase of almost five times on the previous figure of $1.4 million in the fourth quarter of 2013.
Cash flow was also strong for the full year, with the company having over $177 million in the bank at the end of 2014, compared with $65 million at the same time in 2013.
The Investment Case
The investment case for a stock like CyberArk Software (CYBR) is compelling. It serves the need for all organizations to have a strong digital security service at all times to protect against external and internal threats.
CyberArk Software is interesting in that it is pursuing a completely different way or providing this security, by designing solutions that are designed to work if intruders get through. This is clever, because it sets the firm apart from the many other cyber security firms fighting for market share.
A point of difference such as this is why investors are interested in CyberArk Software, and why its share price has performed so well to date.
The risk to the company is that the large competitors in the field like Norton and Symantec begin to develop similar solutions in addition to their market leading external protection abilities. If this happens, CyberArk Software may be forced to cut margins to sell its products and win new clients, which would have a negative effect on revenue and profits.
CyberArk Software (CYBR) is one of many firms providing digital security solutions, but also possesses a unique approach that sets it apart from its competitors. If it can entrench it’s first mover position in this market, it will likely capture a high number of recurring clients, which will give it the ability to reinvest profits to protect it’s market share.