It’s been a while since I looked at a pitch from Hilary Kramer’s GameChangers newsletter, and the topic is certainly timely as we eavesdrop on the UN General Assembly’s chatter about North Korea.
Kramer’s last big pitch was for what she called a Mari-Pharma company, one that she said you would “regret for the rest of your life” if you don’t take a position now — I wrote about that pitch back in March, and… the stock is down slightly in the past six months, so the “regret” hasn’t sunk in just yet. A reminder, at least, that the urgency and the timeframes highlighted in these teaser ads are usually more about getting you to sign up quickly than they are about the actual upcoming drivers for a company’s share price.
So yes, let’s keep in mind that North Korea being in the headlines probably isn’t going to cause whatever stock this is to double overnight… but with that caveat out of the way, what is it that Kramer is teasing? Here’s a taste of her ad:
“I’ve just issued a buy alert on a little-known cyber security company whose advanced software can stop a North Korean, Russian, or Chinese cyber attack dead in its tracks.
“With state-sponsored cyber attacks increasing daily, we’re expecting a 50% run-up in the next 90 days and a double soon after that.
“This is why Wall Street’s top 20 institutions and mutual fund investors own $5 billion worth of shares in this company.
“That’s because they see the same thing we do—a company whose proprietary software can preemptively stop a state-sponsored or criminal hacker attack from anywhere in the world.”
The copywriters at Investorplace (Kramer’s publisher, they also publish Louis Navellier and a bunch of other folks) really like that “top institutions wouldn’t own billions of shares if it wasn’t a great stock” line… but, of course, that’s not really true. Every mid-cap or large-cap stock with a market cap of more than a couple billion dollars, whether it’s a great stock or a lousy one, is majority owned by institutions, some passive and some active.
What other clues do we get about this company?
Well, we get the “you’ll regret it!” language too…
“If you don’t take a small position in this $145 cyber security play, I guarantee you’ll kick yourself as cyber attacks increase and thousands of businesses and governments turn to this next-generation security company.”
And whether or not we end up kicking ourselves, we at least get that clue about it trading at $145 per share. What else?
“… this company’s advanced software can neutralize these kinds of malicious cyber attacks almost like a preemptive strike.
“This is why the company already serves over 70 governments around the world, along with numerous Fortune 500 companies….
“The reason is simple: For American municipalities and companies, this company’s software represents the ultimate in continuous Internet security and protection.”
OK… but that’s how pretty much all the cybersecurity firms describe themselves. What else do we learn about them?
“Analysts at IDC [are] estimating the company will grow its sales by $6 billion in the next three years! ….
“Long Term—a $10,000 Investment Could Grow to Six Figures
“It’s all because of the company’s subscription revenue model, which ultimately locks in clients for life…
“… unlike other Internet security companies that simply sell you software, this company sells you a cloud-based security service.”
That narrows it down some… and I can’t argue with the fact that Wall Street loves subscription-based models now — everyone wants to see a steady stream of income from a “cloud based subscription” instead of selling a box or a software license.
And then we get a few more specific clues…
“… added another 2,000 new customers last month…
“… quarterly revenue is up 24% year over year…
“Generated $1.57 billion over the past trailing 12 months….
“Captured 9% of teh global security market, stealing market share form the likes of Cisco Systems, Check Point Software, and MacAfee….”
Enough for the Thinkolator? Indeed it is… I had to remove the leafblower attachment and dust it off a bit, since autumn is starting to hit us here in the wilds of New England, but it fired up nice and easy and got our answer out quick as can be… this is Palo Alto Networks (PANW).
Palo Alto Networks has had a rough couple of years after being a market darling in 2014 and early 2015, but has been regaining some investor love in recent months, after a particularly bad March quarter gave the stock a 20% haircut. It’s not a cheap stock, but it is profitable on an adjusted basis (it’s not GAAP profitable, and won’t be next year either, probably mostly because of lots of stock-based compensation) — they’re in the first quarter of the 2018 fiscal year, and are expected to earn $3.315 in adjusted EPS, so that’s a forward PE of about 43… or 35 if you bump forward and use 2019 estimates.
Growth has slowed down in reported revenue over the past couple years, partly because they’ve transitioned to different selling models and segments and tried to build more of a subscription business for their next-generation security offering, but the deferred revenue number does keep getting bigger — as of last quarter it’s now up to $1.8 billion, so that provides some confidence in the future and will probably tend to make the company’s earnings guidance more accurate.
I’ve seen plenty of stories about how “Palo Alto Can Make a Comeback” or language to that effect, and we’ve certainly seen plenty of cloud providers enjoy accelerating revenue and earnings as they’ve transitioned to or improved subscription models in the past (I’d say Adobe (ADBE) is probably the poster child for that in recent years), but I don’t have any other unique insight into PANW and don’t really know what their competitors are up to.
Kramer’s data from her pitch is actually a bit out of date — their most recent update was that they had added 3,000 new customers, bringing them up over 42,500, and it was certainly a well-received quarter (the stock popped 10% on the news, about three weeks ago), but you’ll have to judge for yourself whether the stock’s a good value for your cyber-security investing cash. Their latest investor presentation can be downloaded here if you’d like to start your research. When it comes to leading and established cybersecurity stocks that are primarily known for their “firewall” products and services, PANW is similarly valued to the smaller Fortinet (FTNT) and both of those are much smaller than industry giant Check Point Software (CHKP). There are also plenty of other smaller players in the space — and two cybersecurity-focused ETFs, First Trust Nasdaq Cybersecurity (CIBR) and ETFMG Prime Cyber Security ETF (HACK), which are easy places to either look for other names or just get blanket exposure to the sector.
Cybersecurity is a tough and competitive business, and the stocks do tend to react to stories — so perhaps the Equifax data breach will drive more business, or the Russian hacking stories or whatever happens with North Korean or Chinese cyberattacks next time, I have no idea… but over the past two years the broader cybersecurity space has been mostly disappointing for investors — CHKP has done well of late, up 35% in two years, but it seems like for every strong stock in the sector there’s a weak one or two as well (I’m looking at you CyberArk (CYBR), down 37%, and you, FireEye (FEYE), down 60%.
That’s a good thing for newsletters and analysts (and active fund managers), because it means that picking winners has value and it’s not just a matter of choosing the sector ETF and taking a nap… but that only works if the newsletter has some good insight into which of those stocks really is likely to be on the right track. I like the direction Palo Alto is going on an operating basis, and their revenue and earnings seem to have started a nice slope, but I wouldn’t be confident enough to jump aboard without doing a lot more research into the sector… and it’s not exactly a hot momentum idea at the moment, Kramer’s colleague Louis Navellier’s momentum-seeking system grades it with a “C” these days despite that nice earnings surprise last time out.
Perhaps you’ve done some of that cybersecuirty research and would like to share your wisdom? Have a stock you like or loathe in the cybersecurity space, whether Palo Alto or someone else? Let us know with a comment below.
P.S. And we’re building up our collection of reader ratings for investment newsletters, so we’d love to hear what you think of GameChangers — just click here if you’ve ever subscribed to Hilary Kramer’s letter, and let your fellow investors know how you feel.
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