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 Shares of publicly traded cybersecurity firms have outperformed the
market in recent months, as high-profile data breaches at Sony Corp,
JPMorgan Chase & Co and Anthem Inc prompt businesses to spend more
to secure their computer networks.
"The cybersecurity market is in the early innings of a massive
growth opportunity," said FBR Capital Markets analyst Daniel Ives.
"There are many innovative private security vendors. Tech investors'
eyes are glued to who has the 'magic solution.'"
Boston-based Rapid7 provides software and services that help
businesses assess and monitor security risks. It has more than 3,500
customers, including Amazon.com Inc, American Express Co and Bank of
America Corp.
Mimecast, also based in Boston, is an email security firm with
10,000 customers. According to its website, revenue rose 30 percent
in 2014 to $88.4 million. LogRhythm Inc, based in Boulder, Colorado,
provides technology to help companies monitor activity across their
networks.
All three companies are planning to sell shares to the public and
seeking valuations in excess of $1 billion, according to people
familiar with the matter, who declined to be identified because the
plans are not yet public.
Rapid7, whose investors include Bain Capital Ventures and Technology
Crossover Ventures, has chosen Morgan Stanley and Barclays to assist
with an initial public offering, the people said.
LogRhythm, whose investors include Access Venture Partners, Adam
Street Partners, Grotech Ventures and Riverwood Capital, has chosen
JPMorgan Chase and Morgan Stanley for an IPO in the second half of
the year, the sources said.
Mimecast, whose investors include Insight Venture Partners, Dawn
Capital and Index Ventures, has spoken to some investment banks
about an IPO later this year but has not hired any firms, the
sources said.
Representatives from the three companies and the banks working with
them all declined to comment.
VOLATILE STOCKS
With global spending on IT security set to increase 8.2 percent in
2015 to $77 billion, according to market research firm Gartner, the
shares of publicly traded cybersecurity firms have done well.
FireEye Inc shares have risen 38 percent so far this year, while
Qualys Inc is up 24 percent and Palo Alto Networks Inc has climbed
19 percent. The PureFunds ISE Cyber Security ETF has gained 9
percent over the same period, while the S&P 500 Index is up 1.9
percent.
But investing in cybersecurity is not without risk.
FireEye's share price plunged more than 70 percent in less than
three months last year, after Chief Executive Dave DeWalt and other
insiders sold shares, spurring investors to take a more critical
look at the firm's finances and valuation.
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The stock had more than quadrupled in the first six months after its
September 2013 IPO, even though FireEye later reported losses of
$121 million in 2013 and $444 million in 2014. Analysts do not
expect FireEye to post a full-year net profit until 2018, though
they are forecasting rapid revenue growth, according to Thomson
Reuters data.
Amid investor enthusiasm for the cybersecurity industry, FireEye has
recovered this year though at around $42 a share, the stock remains
far below its March 2014 high of $97.35.
Rapid7, LogRhythm and Mimecast are not the only cybersecurity firms
planning to tap public markets this year.
Veracode, which protects Internet applications from hackers, has
selected banks to lead a potential IPO that could value the company
at between $600 million and $800 million, Reuters reported in
December.
Another company widely expected to debut this year is Bit9 + Carbon
Black, whose software protects computers from malware. The firm has
not yet hired banks, according to people familiar with the matter.
It declined to comment.
According to FBR's Ives, emerging cybersecurity companies could earn
a combined annual revenue of $15 billion to $20 billion in three
years. That excludes the slower growing but larger market for
traditional cybersecurity technology, such as anti-virus software.
Venky Ganesan, managing director at Silicon Valley venture capital
firm Menlo Ventures, said average corporate spending on
cybersecurity will rise from about 0.25 percent of total revenue to
as much as 2 percent of revenue in the coming years.
"The window is wide open for cybersecurity companies. We have a
perfect storm of opportunity," said Ganesan, who had invested in
Palo Alto Networks while at Globespan Capital.
(Reporting by Liana B. Baker and Olivia Oran in New York and Jim
Finkle in Boston; Editing by Tiffany Wu)
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