With the plunges with Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN), it seems that the tech IPO game is horrendous. But these social network companies are only one segment of the market. In fact, the offerings from security companies have shown big returns.
This is no accident. Keep in mind that the industry has some big drivers. First of all, hackers are getting more sophisticated, as seen with break-ins at companies like LinkedIn (NYSE:LNKD), Sony (NYSE:SNE), Yahoo! (NASDAQ:YHOO), Visa (NYSE:V) and MasterCard (NYSE:MA). At the same time, companies are more vulnerable to attacks. A major factor is the “consumerization of IT,” which includes the use of mobile devices, the cloud and Internet apps within the workplace.
To deal with these problems, governments have been increasing the regulations on data privacy. Therefore, companies have little choice but to invest in security software.
So what security IPOs look attractive? Here’s a look at three:
Proofpoint (NASDAQ:PFPT): The company leverages cloud computing to deliver security services. It’s an important advantage because it allows Proofpoint to monitor threats on a real-time basis. What’s more, Proofpoint sells its software on a subscription basis, which provides a nice recurring revenue stream.
The company has over 2,400 customers, which include 28 of the Fortune 100. To expand its footprint, it has moved into foreign markets as well.
In the latest quarter, Proofpoint grew sales at 30% to $25.9 million. It also had positive cash flow of about $900,000. The valuation of Proopoint is also reasonable, with the stock at about four times sales.
Splunk (NASDAQ:SPLK): This company is a pioneer in the fast-growing business of Big Data, which involves using sophisticated algorithms to find patterns from massive data sets. And yes, Splunk leverages this for security protection.
But the company is more than just about cutting-edge technology. It has built a thriving developer community, which helps create new apps, provide useful feedback and even help with customer support. Splunk has also forged key relationships, such as with VMware (NYSE:VMW).
Growth for Splunk has been substantial. In the latest quarter, revenues spiked by 80% to $37.2 million, and operating cash flows came to $11.6 million. It has over 4,000 customers.
Splunk’s Big Data platform is quite versatile. Because of its customization features, customers can use it for applications like eDiscovery (for lawsuits), business intelligence and even astronomy.
As for the valuation, Splunk isn’t cheap. The price-to-sales ratio is a nosebleed 19x. Then again, this is not unreasonable in light of the sizzling growth rate in revenues.
Palo Alto Networks (NASDAQ:PANW): It pulled off its IPO in July at $42 a share and is now trading at $64.
The company focuses on next-generation network security software. That is, it guards against threats for emerging technologies like the cloud, social media, virtualization and mobile devices. Palo Alto does this with little degradation to the performance of IT networks and at relatively low cost.
As for the financial performance, Palo Alto has been a standout. For the nine months ended April 30, 2011, revenues surged by 129% to $179.5 million, and cash flows were a juicy $58.5 million.
Just like Splunk, Palo Alto trades at about 19 times sales. But again, such a premium is expected in light of the company’s growth rate — as well as its huge potential for the long term.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.