Profit Potential From the Front Lines of Cyberwar

There’s big news in the booming cyberdefense sector.

In the first week of 2014, we have a new multibillion-dollar business combination that defends against hacks and cyberattacks. It illustrates the “5th Domain of War” theme I’ve mentioned before (especially in the Tomorrow in Review newsletter.)

That is, there’s really big money flowing into defense-related software.

Before I tell you the details, let’s set the stage. By coincidence, over the weekend, I was perusing literature about rising Chinese militarism. That alone makes for a long story.

Among other things, however, I was reading commentary by British military historian Max Hastings. His work on World War II is highly respected.

This is a “one-two punch” kind of approach to stopping cyberattacks. Sort of a “hunter-killer” approach, now within one company.

Hastings quoted a senior Chinese general who said a bit “much,” if you know what I mean. The Chinese general stated that “In the information era, seizing and maintaining superiority in cyberspace is more important than was seizing command of the sea and air in World War II.”

Whoa! Hold that thought. Seizing cyber is “more important” than the sea or air? We have some serious, strategic-level business and defense-investment angles there.

Let’s get to the point. Last week, in the midst of the New Year break, a company named FireEye Inc. (FEYE:NASDAQ) acquired a privately held company named Mandiant. It’s a cash/stock deal valued north of $1 billion.

FireEye provides security software. Mandiant does too, with a focus on implementing emergency responses to computer network breaches.

FireEye debuted on the Nasdaq last September. Since then, the FireEye share price has about doubled, with a big pop at the end of last week. With the Mandiant acquisition, FireEye has a market cap well over $6 billion, although it has yet to turn a profit.

Meanwhile, Mandiant’s metrics are $100 million in revenue in 2012, up more than 76% from the previous year. So Mandiant is growing fast, with almost all of its business being domestic. At the same time, Mandiant is beginning to develop an international presence.

The name Mandiant might be familiar. Last year, Mandiant released a major report on cyberattacks against the U.S. government and U.S. businesses, especially defense contractors. Mandiant identified a long list of hackers from across the world working to implant bad software and otherwise “spy” on corporate and government computers.

Much of Mandiant’s report focused on cyberattacks from China. In particular, Mandiant fingered a unit of top-notch hackers associated with China’s People’s Liberation Army, working out of a command center near Shanghai — speaking of Chinese army generals who want to “seize” cyberspace.

Basically, the FireEye deal with Mandiant combines two complementary companies.

FireEye provides attack-detection technology that works differently from most anti-virus products. That is, most anti-virus products are filtering systems of one form or another. They monitor the Web and identify malicious software that has already begun to hit other targets around the world.

But FireEye software isolates incoming traffic in virtual containers. Then the software monitors code for suspicious activity in a sort of virtual “petri dish,” before deciding whether to let the traffic through or isolate it. This is a novel approach, and FireEye has a long head start on much of its competition.

On the Mandiant side, the company provides timely response to cyberattacks, such as isolating bad code, eradicating it, stopping further damage, identifying the source and more.

This is a “one-two punch” kind of approach to stopping cyberattacks. Sort of a “hunter-killer” approach, now within one company. It’s right up the alley of critical needs for all manner of defense systems, both in government and within the research community, with contractors, logistics and more. And of course, the civilian side of the economy is begging for this kind of cyberdefense capability as well.

FireEye and Mandiant were no strangers to each other. As far back as April 2012, the companies teamed up on a number of initiatives. It seemed to work out well, with complementary corporate cultures.

Then in February 2013, FireEye began to integrate its software with Mandiant threat-detection products, because many customers were already deploying their products and services together. So in a sense, this is truly a market-driven effort.

The new FireEye-Mandiant business structure comes as the U.S. government, state governments, agencies, utilities, Corporate America and many more live in daily fear of getting hacked, pirated, cyberrobbed and otherwise damaged.

While we’re on the subject, it’s clear that most so-called anti-virus software doesn’t work very well — or why else are so many systems getting hacked so often?

In many hacking situations, the victim (so to speak) doesn’t even know that it’s being hacked until after the malicious software has already had a chance to do damage. By then, it’s possible that a company or government entity has already lost critical secrets or data are erased or perhaps a bank account is empty.

Looking ahead, many players in government and business, as well as other sectors of the economy, could turn to the FireEye-Mandiant combination for future protection. This is a company that’s going places.

But if you’re interested in timing the momentum, I’d allow the dust to settle from last week’s announcement of the deal between FireEye and Mandiant.

I’m sure investors would love to see more information on business deals, cash flow and revenues. I want to see where the bottom-line numbers are heading. Right now, the share price seems to be ahead of the fundamentals.

In other words, I’m enthusiastic about where FireEye could go. It’s intriguing tech coming along at just the right time. Still, investmentwise, we need to see performance too. After all, the world is full of great companies that never seem to make any money.

That’s all for now. Thanks for reading.

Best wishes,

Byron W. King
for The Daily Reckoning

Ed. Note: The cybersecurity topic has been popping up everywhere recently. Heck, even local colleges are now offering degrees in advanced cybersecurity. Bottom line, this story isn’t going anywhere. Best to get in while you still can. And one of the best ways to stay up to speed is by reading Tomorrow in Review, where this essay was prominently featured. It’s a completely free service that details the world’s most exciting and important new technologies, and offers readers several chances to discover real, actionable profit opportunities. Don’t miss another issue. Sign up for FREE, right here to get started.