Cisco Can Benefit from Network Security Market Growth, But Upside is Limited

Cyber security threats have received heightened attention lately with reports of attacks on Visa (NYSE:V) and MasterCard (NYSE:MA) in which attackers flooded the websites with traffic, slowing access for customers. ^[1] Lawmakers are pushing for stricter cyber security laws, which bodes well for growth of the network security market, which includes players like Cisco (NASDAQ:CSCO), Juniper (NYSE:JNPR), HP (NYSE:HPQ), and McAfee (NYSE:MFE).

Could this trend create upside to Cisco’s stock value?

Our price estimate for Cisco currently stands at $24.04, already 18% ahead of market price. Network security is one of Cisco’s many product segments, and we estimate that this business contributes roughly 9% of Cisco’s total stock value.

Market Share Declines in Recent Years

Cisco offers security products like firewall, intrusion prevention, remote access and virtual private networks (VPNs), unified client, web, and email security. We estimate that Cisco earned close to $1.9 billion in network security revenues in 2009.

Cisco has seen a notable decline in its network security market share over the past few years. Given the potential market growth in the years ahead, we investigate how Cisco could benefit if the company is able to restore its market share back towards historical levels of between 40% and 50%.

In 2008, Cisco controlled about 40% of the $5.5 billion worldwide network security and appliances market according to Infonetics Research. ^[2] However its share declined to 38% in Q1 2009 and slipped further to 35% in Q2 2009. ^{[3] [4]} As Cisco’s market share fell, competitors like Juniper, Checkpoint, Fortinet and McAfee grabbed a larger share of the pie.

Network Security Market Poised for Growth

According to a 2009 report published by Global Industry Analysts, the global network security market could hit $9.5 billion by 2015, with the growth largely fueled by the Asia Pacific region. ^[5] Additionally, the Intrusion Detection System/Intrusion Prevention System (IDS/IPS) market is expected to become the second largest product segment of the network security market. According to a survey conducted by Infonetics research, Cisco is the market leader in this segment and the preferred choice for companies as an IDS/IPS vendor. ^[6]. The company can potentially leverage its lead position to further expand in this segment and gain share of the network security market.

Limited Upside to Cisco from Network Security Gains

A market share of 50% in 2015 would imply revenues of close to $4.75 billion for Cisco in the network security market. Even with such an ambitious scenario, the potential upside to the company’s stock value is limited (about 3%), as Cisco remains much more leveraged to other product lines including network switches (27% of Cisco’s stock value), network services (17%), and routers (16%). Comparatively, we estimate that Cisco’s network security operations only generate 9% of the company’s stock value.

Drag the trend-line in the chart above to see the impact of various network security revenue scenarios on Cisco’s stock value.

You can see the complete $24.04 Trefis price estimate for Cisco’s stock here.

1. CNNMoney: MasterCard, Visa Targeted in Apparent Cyberattack [↩]
2. Network security market up 8% in 2008 to $5.5 billion, led by Cisco, Infonetics Research, March 4 2009 [↩]
3. Network security market feeling the pinch, down 16% in 1Q09, Infonetics Research, June 25 2009 [↩]
4. Infonetics Research: Network security market shows signs of stabilization and growth in 2Q09, Symbian Developer’s Journal, Sep 15 2009 [↩]
5. Global Network Security Market to Reach $9.5 Billion by 2015, According to New Report by Global Industry Analysts, Inc. [↩]
6. Intrusion prevention system (IPS) vendor ratings survey confirms Cisco’s top-dog status, Infonetics Research, July 6 2010 [↩]