Dominant players will grow in cybersecurity space at the expense of smaller players
Earlier in this series, we discussed the factors that increase the possibility of FireEye’s (FEYE) being bought out in the near future. We also know that cybersecurity is rapidly growing. In February 2016, we noted that this space would see increased consolidation in 2016.
In June 2016, Keith Weiss, Morgan Stanley’s (MS) head of US software coverage, noted, “Consolidation, visibility and automation require scale.” In our view, this scenario is bound to lead to increased M&A and consolidation in this space.
Weiss added, “As such, we believe the big will get bigger, counter to current trends of ‘best-of-breed’ seeing greater share….We think the security software industry is reaching a tipping point of maturity, where we will see a faster pace of consolidation than we’ve seen in the past.”
We believe that FireEye, despite its distinct offerings, faces severe competition in cybersecurity space from Cisco (CSCO), Symantec (SYMC), and Palo Alto Networks (PANW). FireEye lacks the funds, scale and footprint that Cisco and Symantec enjoy. A lack of size, scale, and presence could limit the growth potential of FireEye and similar small players in this space. Either these players will be acquired by large and dominant players or go out of the field. Plus, the cybersecurity space could be dominated by fewer players, a trend we continue to see in the cloud space.
Symantec’s acquisition of Blue Coat Systems, which is the company’s largest acquisition in a decade, allowed it to become a leading enterprise security player.
Cybercrime’s increasing frequency and magnitude
Despite billions of dollars being spent to safeguard digital assets, cybercrime is increasing both in terms of frequency as well as severity. In a research paper, Morgan Stanley noted that the US government has highlighted cybersecurity as “one of the most serious economic and national security challenges we face as a nation.” The US government’s spending on cybersecurity is forecasted to reach $19 billion in fiscal 2017.
The growing consolidation in the cybersecurity space, coupled with lower valuations, makes FireEye (FEYE) a potential takeover target. This possibility of a possible buyout of FireEye could be impacting the market’s sentiment toward FireEye (FEYE) stock.