Cybersecurity: Tiny Cybersecurity Stock on Cusp of Triple-Digit Gains?

Big Upside for Cybersecurity StocksBig Upside for Cybersecurity Stocks?

A few years ago, the area of cybersecurity was sexy. Some cybersecurity stocks in the space were rewarded with lofty valuations that would make social media stocks look like value plays.

The world had become a dangerous place for companies and individuals as far as the ability to safeguard critical information and keep it out of the hands of the bad guys, whether it was a threat from hackers or foreign countries.

Fast-forward and we now find the cybersecurity segment has lost its gleam—at least for now until some massive virtual threat surfaces and it will.

Cybersecurity: The 21st Century Gold Rush

A look at the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) shows the current hesitation, as this group has steadily declined from its high of around $34.00 in June 2015 to $19.00 during the February lows. The exchange-traded fund (ETF) has since been rallying to the $25.00 level and is back to its 50-day moving average.

hack purefunds ise cyber security etf chart 1

Chart courtesy of

Now there are numerous players in the segment, ranging from the very small to large global cybersecurity players.

In the small-cap space, a cybersecurity solutions provider that looks intriguing is Imperva Inc (NYSE:IMPV). The company develops physical and cloud-based solutions to protect critical data and applications.

impv imperva inc nyse chart

Chart courtesy of

A beta of 1.87 for IMPV stock indicates a bigger risk than the S&P 500, but it could also offer a higher potential reward.

This cybersecurity stock is well off its 52-week high of $77.99 and has underperformed the S&P 500 with a decline of 32% during the past 52 weeks. There’s no guarantee Imperva will outperform, but its steady revenue growth creates a decent bullish thesis.

My Bullish Case for Cybersecurity Stocks

Cybersecurity revenue advanced from 2013 to 2015 and is predicted to continue at a healthy rate that could help jumpstart IMPV stock. Imperva is estimated to grow its revenue 29.7% to $303.96 million this year and another 24.2% to $377.44 million in 2017. These are terrific growth metrics if IMPV stock can deliver what Wall Street expects.

What has been missing for Imperva has been its ability to deliver consistent earnings growth. However, it looks like the situation is showing some bright spots in cybersecurity.

IMPV stock could earn an adjusted $0.26 per diluted share this year, which would be more than double the $0.11 per diluted share earned in 2015, according to Thomson Financial. If all goes to plan, Imperva could drive earnings to $0.49 per diluted share in 2017.

You cannot argue the growth metrics if IMPV stock can deliver. This cybersecurity play could easily rally based on implied growth—as long as the broader market rises.

At first glance, a look at the valuation of Imperva shows a high-priced stock trading at 130-times its 2017 earnings per share. The forward multiple doesn’t seem inviting, especially in the current investment climate, as a misstep could hamper the cybersecurity stock’s upside potential.

Yet Imperva stock is all about potential and the ability to perform…

The Bottom Line on Cybersecurity Stocks

Wall Street has a consensus price target of $53.17 on the stock, as Thomson Financial reports. This is an approximately 20% increase from Imperva stock’s current level. For contrarian investors, Imperva is intriguing. However, understand that there is added risk here to compensate for the higher expected return.

Despite the short-term pullback, the cybersecurity story is not a trend that is going away anytime soon.