Small Cap Stock Analysis

As IT Security Threats Emerge, Bluecoat Systems Heats Up

Published: Saturday, April 11, 2009 @ 6:14 PM PDT
Rating N/A
As more companies take advantage of distributed computing over the Internet, their critical applications face new threats everyday. Bluecoat Systems (BCSI) is in a position to benefit from both sides of the equation – the company’s networking appliances and software secure and accelerate the performance of business applications over the Internet. Even though IT spending as a whole is expected to decline in 2009 by 15%, Bluecoat seems to be well positioned as UBS sees IT security spending bucking the trend with growth rates over 10%.

The current economic climate bodes well for Bluecoat Systems given the fact that companies are laying off workers by the thousands everyday and cyber crime is on the rise.  As a result, IT security postures are being elevated to protect digital assets from being compromised by disgruntled workers on their way out and against hackers in general. A huge threat of cyber crime surfaced just last week as the Wall Street Journal reported that spies had infiltrated the nation’s electricity grid.

On Thursday Bluecoat’s shares surged over 12% in 2.5 times normal volume, a day when sector mate Websense (WBSN) issued a positive preliminary earnings report. From a technical perspective, Thursday’s rise was significant as shares bolted past prior resistance around the $14 level on impressive volume.  On a valuation basis, Bluecoat’s shares trade at 15 times forward earnings and a price to sales ratio of only 1.28 even though the company has grown its sales at a 44% annual rate over the past 5 years.

It’s also worthy to note that networking giant Cisco, with over $30 billion in cash, is on the prowl for acquisitions and could bolster its security offerings by buying Bluecoat. All things considered, Bluecoat’s shares have the potential to hit the $20 mark before quarter’s end.

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