Virus Killing is Their Business...
...and business is good. But can Symantec fend off the competition and keep growing fast enough to justify the stock's lofty valuation?
(MONEY Magazine) – Why it's hot
Shares in Symantec (SYMC), the maker of Norton AntiVirus software, have raced from $8.35 to $51.80 since the end of 2000. If you're keeping score at home, that's a 63% annualized return.
It goes to show that it helps to be in a business that solves a big problem most of your investors have. Symantec attacks computer viruses, spyware and e-mail spam. If you have a broadband connection and download lots of music and software files, it's probably only a matter of time before you lose a weekend trying to hunt down and kill some pesky spyware that's slowing your PC. And what's a nuisance for you is incredibly costly for businesses. The research firm Computer Economics figures that $17 billion will be lost worldwide to cyberattacks this year, an increase of over 400% from 1997. No surprise, then, that computer security software is already a $3.4 billion business—and tech analysts at IDC think the market will more than double, to nearly $8 billion, by 2008.
Symantec is by far the strongest player in the field, pocketing about one in every three dollars spent on security software. About 25 million of its customers pay by annual subscription, which locks users into the product and makes revenue much more predictable. What's more, CEO John W. Thompson has been steadily pushing the company beyond its well-known consumer brand into the corporate market. Even as the consumer business booms, sales to large companies account for half of Symantec's revenue.
Let's start with the most obvious one: the stock price. It's about 40 times the past year's earnings per share, and eight times sales. Sure, Symantec's growth is impressive—profits increased 37% in the past fiscal year. But look at how the valuation compares to those of other software issues. The average stock in the industry changes hands at just 26 times earnings and twice sales. Pay a high premium over those numbers, and you're betting that little can go wrong at Symantec.
How safe an assumption is that? When a company grows as fast as this one has, competitors often decide to get in on the action. Jim Huguet, a money manager who owns Symantec in his Great Companies--Technology fund, thinks the Norton brand is so powerful that no rival has a chance. "It has achieved a level of trust that would be difficult for others to catch," he says. But the threat now comes from both the low end of the market and the big players. Individual users can go with free software like ZoneAlarm. Meanwhile, Cisco Systems' (CSCO) foray into security could render Symantec redundant by thwarting attacks within data networks—before they reach your computer. Analysts also detect rumblings from Microsoft (MSFT). "Symantec has never had to go head to head with Microsoft," says Douglas Crook of Morse & Cabot.
And consider this: Since March, Symantec insiders have sold 1.65 million shares. Why should you buy when they're selling?
Sales have room to grow. Does the stock price?
Computer security software sales (billions)
Note: As of July. Source: IDC.