Analysis of Company Cyberark (cybr)

To what extent are markets efficient? Given your stance, how would you, as a midcap equity money manager, allocate capital?

Markets are not completely efficient because investors can identify patterns and invest according to those patterns to beat the market. While close to efficient, markets are merely approximations for rational action. Markets are too volatile to represent complete rationality; spikes in market prices often occur around earnings and other corporate announcements and exceed expected variation from a purely financial standpoint. Thus, markets incorporate the irrationality of human emotion into pricing and are therefore inefficient themselves.

Assuming markets are inefficient, there are opportunities for investors to exploit trends andmake money. In today’s market, as a midcap equity money manager, I would be extremely aggressive in the short term to maximize profit. Within the next few years, I anticipate the S&P 500 to drop to about $2,500. Consequently, I would liquidate my holdings within a year after my initial investment, wait for the market to drop, and then reinvest in a different asset allocation at a lower market price.

Today, I would invest 60% of my portfolio in the telecommunications equipment sector and 40% in the software sector because I would liquidate my assets shortly after US deployment of 5G wireless communication. Ciena Corp. (CIEN) and LogMeIn Inc. (LOGM) are examples of equities from both sectors whose prices would increase with 5G deployment. The four main US wireless carriers (Verizon, AT&T, Sprint, T-Mobile) are targeting end of 2018 to early 2019 for mass 5G deployment. Thus, I would invest now and liquidate all of my holdings after 5G is commercially available.

Please analyze any company in the S&P MidCap 400 and provide a Buy or Sell recommendation with a price target. Your response should include a one page investment thesis, rationale, and some form of valuation work.

Company Overview: CyberArk (CYBR) is a privilege access security company focused on protecting enterprise data, networks, and infrastructure from malicious actors. CyberArk protects critical assets for over 50% of Fortune 100 companies. Their enterprise platform is comprised of both security and risk management services, to thwart all potential attack vectors, and audit and compliance services, to ensure data is handled according to local laws and regulations. Based in Israel with US headquarters in Newton, Massachusetts, CyberArk has numerous federal agencies as customers. They are listed on the NASDAQ: CYBR, as of 9/19 closed at $72.73, and have a market cap of $2.64 billion.

Investment Thesis

Cyber Ark is currently undervalued so now is an ideal time to buy and hold until CYBR reaches a target price of $82.84. The three catalysts below will raise Cyber Ark’s price 13.9% to $82.84 within the next three years.

1. Consolidation of the enterprise cybersecurity market
2. Product innovation due to increasing government spending on cybersecurity
3. Future government regulations on data use

Consolidation of the enterprise cybersecurity market: The enterprise cybersecurity market is currently undergoing a consolidation period. Large companies have been acquiring a variety of smaller companies in an attempt to position themselves as full service security providers. Generally, one company will acquire a number of PAM (Privilege and Access Management), SIEM (Security and Information Event Management), CASB (Cloud Access Security Broker), and MFA (Multifactor Authentication) companies and proceed to combine them all under a single platform to offer a more seamless client experience. Take Cisco for example, a giant in the CASB space. This past month, Cisco acquired Duo Security for $2.35 billion, which is a PAM and MFA company. In February of this year, Cisco acquired Skyport Systems to strengthen their CASB-SIEM interoperability. Last year, Cisco acquired AppDynamics for $3.7 billion to supplement their SIEM technology. This pattern of consolidation has been a recurring theme in other companies as well, such as Bomgar, Splunk, and KPMG.

This market consolidation presents some unique opportunities for Cyber Ark. They could be acquired or merge with another company. IBM, Microsoft, Amazon, and Lockheed Martin are all companies who would potentially be interested in Cyber Ark if they are looking to expand their PAM offerings. In terms of a timeline, those types of companies will most likely acquire Cyber Ark within the next three years, before Cyber Ark becomes too expensive. Even if Cyber Ark does not get acquired or merge with another company, this market consolidation has removed most of their competitors via acquisitions by massive enterprises. Cyber Ark can now carve out a niche market and be relatively insulated from competition because these larger companies will not spend the time or resources necessary to challenge Cyber Ark’s market control. Thus, the consolidation of the enterprise cybersecurity market has the potential to benefit Cyber Ark, especially within the next three years.

Product innovation due to increasing government spending on cybersecurity: Governments around the world account for a significant percentage of the spending in the cybersecurity market. The US government alone represented 2% of the global cybersecurity market this past year. In 2007 the US government spent $7.5 billion on cybersecurity, by 2016 that amount increased to $28 billion. Going forward, government spending on cybersecurity will only increase as technology becomes more and more ubiquitous and the number of actors with malicious intent increases. Cybersecurity requires constant attention, meaning defense departments will continuously pay billions to ensure protection of their critical assets. Many underdeveloped foreign nations still have considerable work left to improve their cybersecurity postures, which will further increase cybersecurity spending. Cyber Ark is uniquely poised to benefit from this uptick in global government spending.Cyber Ark currently counts numerous governments and government agencies as clients. These relationships will be incredibly valuable as governments increase spending in the cybersecurity market. Cyber Ark currently offers single platform sign-on services for government agencies, which ensures maximum security while also preserving efficiency and ease of use. In the future, Cyber Ark will most likely expand their offerings to satisfy the increase in government demand for security products. New offerings will likely include authentication and data protection services. These new products will expand Cyber Ark’s revenue streams and will have private sector applications as well. Ultimately, this product innovation will enable Cyber Ark to strengthen their position in the cybersecurity market.

Future government regulation on data use: Government regulations and policies are slowly catching up to technological developments. Earlier this year, the EU launched the General Data Protection Regulation which outlines rules for companies in regards to appropriate handling of user data. Companies that fail to comply with GDPR face severe consequences, which has made GDPR compliance services a popular offering for cybersecurity companies. In the US, California became one of the first states to adopt a data privacy law with the California Consumer Privacy Act of 2018. The US is expected to develop a nationwide data privacy law similar to GDPR sometime within the next five years. Numerous European companies have retained GDPR auditors and compliance officers to protect against fines from failing to adhere to the stipulated regulations. Data privacy and management companies will benefit immensely from these new policies and service markets. Thus, as data privacy regulation continues, demand for Cyber Ark’s compliance services will grow.

Today, Cyber Ark offers a wide variety of audit and compliance services. These services include IT audit and reporting tools, GDPR specific compliance software, and ENISA (European Network and Security) critical infrastructure security management. As demonstrated by their existing offerings, Cyber Ark already has a strong foundation for products that assist in government reporting and the compliance process.

In the future, as governments increasingly regulate cyberspace and user data, Cyber Ark will expand their offerings to make audit and compliance a larger portion of their core business. There is even the potential for Cyber Ark to spin off their audit and compliance teams as a separate entity, depending on how big the regulatory protection market becomes. Regardless, Cyber Ark already has all the tools in place to adapt to this new, growing market. Overall, Cyber Ark is well-positioned to capitalize on increased government regulation in the data management and protection space.