Over the past couple of years, one of the best performing industries has been computer security. As the global threat of hacking and identity theft become more serious thanks to the increasing sophistication of computer criminals, companies that focus on protecting end-users from these kinds of attacks have seen a major pickup in their business. Well what if I told you that there is a company that has patented technology with the ability to detect threats before they are known? That company is Finjan Holdings (OTCQB:FNJN). Below are 5 reasons why investors should strongly consider an investment in Finjan.
Company Profile
Finjan Holdings is a leading online security and technology company which owns a portfolio of patents, related to software that proactively detects malicious code and thereby protects end-users from identity and data theft, spyware, malware, phishing, Trojans and other online threats. The company was one of the first companies to develop and patent technology and software that is capable of detecting previously unknown and emerging threats on a real-time, behavior-based basis, in contract to signature-based methods of intercepting only known threats to computers.
Reason #1 - Security Companies Are Soaring
The innovation of companies over the past decade has truly been a wonder to behold. Any kind of information is at the tip of your fingertips which saves businesses and consumers an immense amount of time in their daily lives. Unfortunately, that valuable and often sensitive information is also available to the wrong kind of people. This sensitive information can include employee's Social Security numbers, passwords and passcodes for a variety of functions and information critical to a company's success. And let's not even get started on bank and credit card account numbers which seem to have daily problems with hacking attacks.
Because of the increasing danger in cyberspace, companies that have developed technology capable of stopping these threats have seen a huge pickup in their business, and consequently, their share prices.
A few of the most popular companies involved in cybersecurity include Symantec (SYMC), Check Point Software Technologies (CHKP), and IntraLinks Holdings (IL). All 3 of these companies have had incredibly strong performances over the past year.
Symantec is involved in providing security, backup, and availability solutions worldwide. Its products and services protect people and information in any digital environment from mobile devices, enterprise data centers, and cloud-based systems.
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As the chart above shows, shares of Symantec have appreciated by roughly 19% over the past year.
Another strong performer in the cybersecurity industry has been Check Point Software Technologies. Check Point Software Technologies develops, markets, and supports a range of software, and combined hardware and software products and services for information technology security worldwide.
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Like Symantec, shares of Check Point Software have soared over the past year. Investors have enjoyed a 37% rise in value over the past 52 weeks. With shares trading at a 52-week high, the momentum appears to be strong.
A third strong performer in the industry has been IntraLinks Holdings. IntraLinks Holdings provides software-as-a-service solutions for secure content management and collaboration within and among organizations worldwide. Its cloud-based solutions enable organizations to control, track, search, and exchange time-sensitive information inside and outside the firewall, within a secure environment.
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IntraLinks is another perfect example of a soaring cybersecurity company. Shares of the company have increased by nearly 70% during the past year.
These three companies showcase the potential of the industry and the increasing need for security protection software. This need should help to deliver significant gains for Finjan over the coming years.
Reason #2 - Strength of Patents in the U.S. and Internationally
Finjan Holdings has invested considerable time, effort and resources to secure its inventions with US and Foreign patents. As the company's patented technologies have increased in relevance, Finjan has been able to earn more than $125 million in licensing revenues. This revenue generation has been a combined effort of both licensing patents to some of the largest players in the industry and enforcing patent protection through litigation.
Thus far, Finjan has been able to license its patents and technology to 5 companies, 2 of which are confidential. The other 3 companies include Microsoft (MSFT), M86 Security, and Trustwave.
Approximately 80% of the company's revenue has come because of licensing. The deal with Microsoft was struck in 2005 ($8 million), the deal with M86 Security in 2009 ($25% equity), and the deal with Trustwave in 2012 ($3.1 million). The two confidential deals were both completed in 2012 and together total $96.3 million.
The other 20% of the company's revenue has come through litigation (enforcing its patents). In 2008, Finjan Holdings won a large jury award against Secure Computing in the amount of $37.9 million.
One of the main reasons why Finjan Holdings really caught my attention is because of the company's global perspective. While I expected them to have a strong patent focus in the U.S., the company has done an admirable job of expanding their reach to almost all parts of the world. Finjan has been granted patents in the following parts of the world:
* North America
- Canada - 1 Patent
- United States - 21 Patents
* Europe
- United Kingdom - 1 Patent
- Germany - 1 Patent
- Netherlands - 1 Patent
- France -1 Patent
- Italy - 1 Patent
* Asia
- Israel - 3 Patents
- Japan - 1 Patent
I believe this global perspective is really going to help Finjan Holdings participate in the rapid growth that I am predicting for the cybersecurity industry. As the entrepreneurial spirit continues to take hold of new parts of the world, the need for global patent enforcement and licensing will only increase.
Reason #3 - Single Vertical vs. Multiple Verticals
I'm sure the header for reason #3 probably doesn't resonate as quickly as the other two reasons but let me explain. Historically, software security has been focused on solving problems once they become known. Consumers experience this on a daily basis when they scan for viruses/spyware and have to go through the process of cleaning out their computer to eliminate the problem.
But Finjan Holdings is focused on building a horizontally integrated disruptive licensing program based on behavior based threat detection. These verticals include software, web infrastructure, and networking equipment.
- Endpoint & Cloud: Comprehensive software protection for endpoint devices including the emergence of smartphone operating system security. This is a $19.2 billion market with a compound annual growth rate of 8%
- Web Gateway: Includes consumer and enterprise malware protection delivered over the cloud as well as web/gateway infrastructure protection. This is a $1.2 billion market with a 15% compound annual growth rate.
- Next Generation Firewall: Traditional networking equipment now includes integrated malware protection. Both purpose built boxes and a next generation firewall. This is a $4.8 billion market with a 9% compound annual growth rate.
Together, these industry verticals represent a $25.2 billion market every year. This represents massive potential for a company like Finjan Holdings that is only valued at $175 million. Because of the company's global reach, its focus on behavior based threats, and its ability to enter licensing agreements with some of the largest companies in the world like Microsoft, it's no wonder that institutions have taken a strong liking to the company.
Reason #4 - Institutional Holdings ("The Smart Money")
Investors often feel lost because there are simply too many stocks and too many opportunities to follow all at once. And most investors likely don't have a team of analysts able to do the research for them. So what is an investor to do? Well I can tell you what I do. I follow "the smart money."
This means that before I invest in a company, I like to check the institutional ownership and make sure that is fairly high. Normally I'm pretty thrilled if I can find companies with more than 50% institutional holdings. Finjan Inc. has managed to retain a 99% institutional ownership. 92% of that is from original investors in the company such as Benchmark Capital and Cisco. Benchmark Capital owns just over 26% while Cisco owns an impressive 8.25%. In addition to these firms, several venture capital firms are invested. Venture capital firms typically hire only the best and brightest analysts who spend countless hours analyzing financial statements of companies before they invest.
Now while it's not a guarantee that Finjan shares are going higher because these companies have invested, it certainly makes me feel better knowing that these companies are risking millions in the company.
Reason #5 - Strong Cash Position
Given that Finjan Holdings is a still a small but growing company, investors should pay attention to the amount of available cash that the company has to investigate if there may be any secondary offerings lurking around the corner. It appears that no secondary offerings will be necessary here.
As of September 30, 2013, Finjan Holdings had approximately $27.2 million in cash and cash equivalents. For the year 2013, the company's monthly burn rate has been about $350,000 per month. Based on that, it would seem that the company's cash will last the company for many years until additional financing would be necessary.
Additionally, the company has no long-term debt on its books which means the company won't have to worry about financing expense going forward. This is a big benefit for the company and shareholders as the company can spend its resources enforcing its patents, licensing its patents, and pursuing further patent acquisitions to strengthen its hold across various areas of the cybersecurity world.
Risks
One of the things that investors will want to pay attention to is revenue and net income growth over the coming years. While it's great to have a strong patent portfolio, that portfolio needs to result in revenue growth. And that revenue growth ultimately needs to trickle down into growing net income.
Also, investors will want to pay attention to the growth of the patent portfolio. Technology is constantly changing, almost always for the better. New companies seem to come out of nowhere with a game changing idea that puts other companies out of business. Because of this, Finjan Holdings will need to continue its acquisitions of patents that it feels will benefit the company in the long run.
Lastly, the competition in the patent space has really heated up over the past 5 years as some really smart leaders have started to realize the importance of being able to defend an idea. This means that Finjan Holdings won't be the only company looking to acquire new patents at the most affordable price. Management will need to think strategically and creatively about what it wants to do, how it wants to do it, and at what cost. It will certainly be interesting to see what Finjan accomplishes over the next year.
Conclusion
Finjan Holdings appears to be an extremely promising company in the cybersecurity patent space at a fairly affordable market valuation. 5 years ago, several other patent portfolio companies such as Acacia Research Corporation (ACTG), InterDigital (IDCC), and VirnetX Holding Corp (VHC) offered similar potential. Unfortunately those opportunities have come and gone. But Finjan Holdings still has great potential and investors looking for an interesting play in this space should strongly consider this company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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