Internet security stocks took a big hit this week thanks to revenue shortfalls, analyst downgrades, and worries about the diversion of corporate budgets toward Y2K spending.
Both Network Associates and Axent warned Wall Street that their quarterly revenues would fall short of expectations.
Investors are concerned that corporate computing budgets may be diverted to address looming Y2K problems faced by many companies, resulting in lower sales of security software for the rest of the year. Analysts say these worries have already hit companies in the enterprise resource planning sector, where stock prices are languishing.
Shares of
This week, it was the security sector's turn to get hammered. "The paranoia
surrounding Y2K is hurting all these stocks," said Todd
Raker of ING Barings, who this week downgraded both Axent and firewall vendor Check Point Technologies.
Raker said Y2K worries about security stocks may be overblown but they're real,
nonetheless. "I think it will have impact on revenue, but I don't
think it'll be a disaster," he said.
"Y2K is putting a squeeze on a lot of
these vendors," said David Breiner, who follows Axent and other security
stocks for Volpe Brown Whelan. But he
noted that different factors affect each company.
In the security sector, "There have been very few consistent success stories,"
said Breiner. Security Dynamics, parent of RSA Data Security, relies on a handful of
products for its revenue, he said.
Although Check Point, with a relatively narrow product focus, hasn't been hit
by a Y2K slowdown yet, Raker thinks one will come later this year.
Axent and Network Associates both
attributed their woes in part to a Y2K slowdown, but they also had trouble
closing orders by the end of the quarter. Secure Computing, another vendor
with a broad line of security offerings, warned last week that first-quarter
revenue would be 36 percent below the
comparable 1998 period.
That slew of earnings warnings led Check Point late Wednesday to say its
results are up to expectations. "We have not experienced the difficulties
which some of our competitors state are affecting their business," CEO Gil
Shwed said in an unusual statement.
Check Point's stock bounced back today, closing at 33.6875, up almost 7 on
the day. Check Point, which opened the week near 40, and other
security issues were pulled down by the bad news from Axent and Network
Associates.
Axent rebounded today too, closing up 1.6875 to 11.0625. Axent shares
dropped from 20 on Monday, the day of its warning, to close at 8.06, a
52-week low.
Network Associates, however, continued its downward spiral today, closing
at 14.75, down 1.25. The stock opened the week above 30, and even the rollout of new security software on
Monday didn't stem its fall.
"All the security vendors are going to
face difficulties in the third and fourth quarters," Raker said. "Check
Point is the most sheltered because a firewall is easy to install. Some of
the Network Associates or Axent solutions are more complex and
enterprise-wide."
Other companies are insulated by investor perception about their business.
Raker believes investors see digital certificate company VeriSign as a
consumer e-commerce play because it issues digital IDs to retailers like Amazon.com. But Entrust, another digital ID firm that is
focused on the enterprise market, is more vulnerable.
Security software is usually a tougher sell, said Breiner, because it addresses
potential problems, not something that's causing a corporate security manager
pain today.
"Security is a more subtle value proposition" than other types of software, he
said.
Industry analyst Jim Balderston of Zona Research professes to be
mystified about why Internet security stocks aren't awarded the large
price premiums so common in the Internet sector.
"You cannot do electronic commerce, you cannot do extranets or partner
applications, without security. It's a building block of all these other
opportunities," said Balderston, who thinks the nature of security
technologies scares off investors.
"Security is still arcane and largely invisible. To most people, it's
technically indecipherable," he said. "That may be one of the reasons why
these companies don't get that Internet slack."