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Will Symantec get Netscaped?
Shares of the anti-virus software leader have fallen on concerns about a threat from Microsoft.
June 29, 2004: 1:59 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - There's a big company based in Redmond, Washington that you might have heard of. Its name is Microsoft. And it has a nasty habit of barging into new markets and crushing those in its way.

There's even a name for the fate of the victims: It's called getting "Netscaped", which refers to how Netscape, formerly the king of Web browsers (and now a small subsidiary of CNN/Money parent Time Warner) became irrelevant once Microsoft started bundling its Internet Explorer browser into the Windows operating system.

Now investors are starting to worry that Symantec, which makes the popular Norton brand of anti-virus software is in danger of being Netscaped.

Microsoft has made some rumblings lately about stepping up its presence in security software. There has even been some speculation about Microsoft looking to buy Symantec rival Network Associates, which sells the McAfee line of anti-virus software. Network Associates shot down the takeover rumors last week though.

Partly because of the Microsoft threat, shares of Symantec (SYMC: Research, Estimates), one of the hottest tech stocks for the past year, have fallen nearly 12 percent during the past 2 months.

So can Symantec avoid the fate of Netscape or will it become the latest example of a once hot tech company that Microsoft crushed like a grape?

Don't sweat Mister Softee

Richard Williams, an analyst with Garban Institutional Equities and one of only two analysts with a sell rating on the stock, said that investors should not dismiss the looming Microsoft threat. "Microsoft is the dominant player if it chooses to be which would mean there would be significant market share losses for Symantec," he said.

However, history has shown that Microsoft hasn't been able to Netscape every company. Intuit and Adobe Systems are two software companies that have thrived despite competition from Microsoft.

And Microsoft will have a tough challenge in the security-software market.

"Symantec has fantastic brand awareness. Norton users won't be easily dislodged," said Gregg Moskowitz, an analyst with Susquehanna Financial Group. "We won't see a dramatic shift when Microsoft enters the business."

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What's more, this isn't the first time the market has been spooked by Microsoft's security push. In June 2003, Microsoft acquired GeCad, a Romanian developer of anti-virus software.

Shares of Symantec sold off initially on that news but quickly bounced back after a wave of computer worms and viruses last summer created a surge in demand for security software.

The stock, even with the recent pullback, is still up 25 percent year-to-date and nearly 100 percent in the past 12 months. So the Microsoft concerns may have been just an excuse for momentum investors to take some profits.

"A lot of investors were looking for a point to jump off after the great run the stock had," said Donovan Gow, an analyst with American Technology Research. He said the stock, trading at about 29 times fiscal 2005 earnings estimates, is now reasonably attractive given that earnings and sales are expected to increase by 26 percent in 2005.

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Gow adds that the company's recent acquisition of Brightmail, a privately held developer of spam filtering software that had filed to go public earlier this year was a savvy move that should help boost growth.

In particular, it could help Symantec increase its penetration in the corporate market, which currently accounts for a little more than half Symantec's business. "Spam is a bigger growth driver than many investors realize," Gow said. "It is getting to a point where corporations are willing to pay up to do something about it."

Still, even if you cast aside the Microsoft concerns, Williams said Symantec is not worth its current price because sales and earnings growth is expected to slow from last year's torrid pace.

Though true, it may turn out that earnings won't slow nearly as dramatically as analysts expect. Analysts have raised earnings estimates for fiscal 2005 by 8 percent during the past three months while the consensus profit projection for 2006 has gone up 9 percent.

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Symantec has already shown that a couple of nasty bugs can create big business. And let's get real. It doesn't look like the threat of new viruses is going away anytime soon. So current earnings estimates may still be too low.

Garban's Williams has a short position in Symantec and his firm has no investment banking ties to the company or other companies mentioned. All other analysts quoted do not have a position in the stocks mentioned and their firms have no investment banking relationships to any companies mentioned.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.