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Cybersecurity on Deck; Palo Alto Earnings Out This Week

Cybersecurity continues to grow as a concern for individuals, businesses and government entities as the world increasingly performs daily activities electronically. A host of companies have formed to deal with cybersecurity, and if you play your cards right, you may find one, or more that make for solid investment choices for your needs.

Services provided by cybersecurity companies include providing protections to companies’ networks through the use of firewalls, providing cloud storage protections, and preventing e-mail viruses. Most appealing is their ability to stop hackers.

While several of these companies are thriving due to the services they provide, many are suffering from the various costs of doing business. If you want to invest in the space, pay attention to the risks that each of them possess.

The problems range from skyrocketing stock options for employees, to declines in customer demands. These problems can cause the revenues of companies that operate in the space to fluctuate. In fact, many see cybersecurity as being one of the most volatile spaces within the tech sector.

Considering the needs for their services and products, cybersecurity companies are making plenty of money. Furthermore, there is plenty of money to be made. According to Markets and Markets, the global cyber security market size is estimated to grow from $106.3 billion in 2015 to $170.2 billion by 2020, at a Compound Annual Growth Rate (CAGR) of 9.8%.

Of the companies that provide cybersecurity services, Palo Alto (NYSE:PANW) is one that has managed to give investors the most fits. For the past seven quarters, its sales have grown by at least 50%. On that same note, its earnings per share are not doing so well. They are negative $2.29. Of some of its competitors like Barracuda Networks (NYSE:CUDA) and Fortinet (NASDAQ:FTNT), Palo Alto’s EPS is the worst. For example, Barracuda’s EPS is negative $0.08 and Fortinet’s EPS is $.02.

The street expects Palo Alto to report earnings of $339.4 million for the third quarter of 2016 and $.41 in EPS. That would be an impressive increase of 45% and 78%, respective over the same period in 2015. It reports on Thursday.

Observers point out that this is likely the first quarter in at least two years where any sort of slowdown has been detected in Palo Alto’s demand.

Like most observers of Palo Alto, I would not make it a short-term play. Go long, and be ready to weather the ups and downs from its fluctuating revenues and expense pressures.

A good short-term play is Barracuda. Its stock is up more than 4% over the past month, reflecting growing interest in the stock. Zacks points out that Barracuda’s consensus estimate trend has also increased, from $.04 cents per share 30 days ago to $.09 cents per share as of Friday. That’s an impressive increase of 55.6%.

Fortinet has been singled out as a winner in the space by Barron’s due to the company’s ability to help its clients manage their existing technology, and offer protection on multiple fronts. Barron’s noted that Fortinet is up 37% since it recommended them nearly three years ago in a report looking at the industry.

There is an ETF that contains several security software companies whose performance also reflects the fact that the security sector is starting to show signs of slowing. The slowing is based on the guidance that was provided for the second quarter of 2016, as well as full year guidance by cybersecurity companies. The ETF is called the PureFunds ISE Cyber Security or HACK, and the fund is down more than 30% since last year.

Given the demand for their services, cybersecurity companies stand to make billions in the coming years. The key for them is to be able to handle the expenses of providing their services without damaging their top and bottom lines.

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