Despite major changes to the global economy during the past 24 months due to COVID-19, the security industry has proven itself resilient across its various sectors. Most notably, companies in the physical security sector that embraced increased demands in data security and home security systems, as well as those in the cybersecurity sector which delivered solutions in the emerging Cloud security space.

With a substantial shift to remote work and heightened migration to Cloud-based applications globally, demand for increased cybersecurity capabilities has come to the forefront of many organizations and driven continued strength in the market.

As organizations must now secure data and communications outside of on-premise systems their exposure to attacks have meaningfully increased. Cyber criminals have leveraged the situation to infiltrate networks and expose vulnerable systems that lack proper defense capabilities.

These factors have converged to contribute to significant investor interest in various sub-segments, including managed service providers (MSPs), managed security service providers (MSSPs) and secure access service edge (SASE) related companies.

More broadly, despite continued economic uncertainties and challenges, the global stock market remained near all-time highs driven by fiscal and monetary stimulus as detailed in the following:

▶ The S&P 500 index closed the year with a 26.9% gain compared with the previous year return of 16.3%.

▶ The Dow Jones Industrial Average outperformed a 2020 return of 7.2% with 2021 gains of 18.7%.

▶ The Nasdaq Composite Index concluded 2021 with a gain of 21.4% compared to a 2020 gain of 43.6%.

Overall investor sentiment remains strong with the S&P 500 enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) multiple remaining at 16.8x vs. the historical three-year average of 14.2x.

However higher growth segments of the market have seen a slight decline in valuation due partially to inflation fears, despite strong economic trends and positive earnings growth.

The First Trust Nasdaq Cybersecurity (CIBR) and HACK exchange-traded funds (ETFs) enterprise value-to-EBITDA multiples declined from 37.3x and 29.3x to 26.2x and 26.1x, respectively during 2021 as higher valued companies in each index experienced valuation declines.

The average multiple for physical security companies declined from 28.8x to 24.1x as many smaller and higher growth names dragged down overall valuation of the equal-weighted average including larger more stable companies.

Throughout 2021 M&A remained a significant component of growth as small to large enterprise players across a wide variety of sub-segments remained highly acquisitive with intentions to broaden service offerings and strengthen core capabilities to meet increasing customer demands for comprehensive platforms.

Industry M&A activity outpaced the already near record 2020 levels, with strategic acquisitions accounting for ~60%+ of total transactions.

The cybersecurity market is projected to grow from a value of $180 billion in 2021 to $270 billion in 2026, and the physical security market projected to reach $171 billion by 2027 from its current value of ~$110 billion.

Combined with five-year spending forecasts at both the government and enterprise level that are expected to exceed $1 trillion, the industry is primed for expansion and innovation. Publicity surrounding recent large-scale security breaches such as the customer data loss at T-Mobile in August 2021, and the resulting impacts have forced organizations to move security requirements to the forefront of budgeting and planning discussions.

A representative index of 28 physical security stocks compiled by Capstone Partners experienced an average growth of 13.8% in 2021. An index of 50 cybersecurity stocks increased 9.8% in the same period. The following is a sampling of some of the strongest and weakest performing stocks in the physical and cybersecurity arenas in 2021.

Stock Performances

Physical Security, Strong Performers

Identiv (Nasdaq: INVE)

▶ 231.1% stock price increase

▶ Revenue increased by 15.2% from $86.9 million to $100.1 million over the last 12-month (LTM) period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple decreased from 211.6x to 131.2x for the 12 months ending Dec. 31NUUO (TPEX: 6419)

▶ 150.5% stock price increase

▶ Revenue increased by 8.9% from $6.8 billion to $7.5 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-revenue multiple increased from .23x to 1.1x for the 12 months ending Dec. 31

NUUO (TPEX: 6419)

▶ 150.5% stock price increase

▶ Revenue increased by 8.9% from $6.8 billion to $7.5 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-revenue multiple increased from .23x to 1.1x for the 12 months ending Dec. 31

Napco Security Technologies (Nasdaq: NSSC)

▶ 90.6% stock price increase

▶ Revenue increased by 12.4% from $101.4 million to $114 million over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 34.7x to 42.2x for the 12 months ending Dec. 31

Johnson Controls Int’l (NYSE: JCI)

▶ 74.5% stock price increase

▶ Revenue increased by 6.1% from $22.3 billion to $23.7 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 11.5x to 13.4x for the 12 months ending Dec. 3

TKH Group N.V. (ENXTAM: TWEKA)

▶ 30.5% stock price increase

▶ Revenue increased by 3.6% from $1.5 billion to $1.5 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 11.8x to 14.8x for the 12 months ending Dec. 31

Cybersecurity Strong Performers

Fortinet (Nasdaq: FTNT)

▶ 142% stock price increase

▶ Revenue increased by 20.5% from $2.6 billion to $3.2 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 42.4x to 80.6x for the 12 months ending Dec. 31

Cloudflare (NYSE: NET)

▶ 73.1% stock price increase

▶ Revenue increased by 36.6% from $431.1 million to $588.8 million over the LTM period ending Sept. 30

▶ Enterprise value-to-revenue multiple increased from 58.4x to 70.9x for the 12 months ending Dec. 31

A10 Networks (NYSE: ATEN)

▶ 68.2% stock price increase

▶ Revenue increased by 7.3% from $225.5 million to $242 million over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 19.4x to 24.5x for the 12 months ending Dec. 31

ZScaler (Nasdaq: ZS)

▶ 60.9% stock price increase

▶ Revenue increased by 56.1% from $431.3 million to $673.1 million over the LTM period ending Oct. 31

▶ Enterprise value-to-revenue multiple increased from 54.8x to 58.4x for the 12 months ending Dec. 31

Juniper Networks (NYSE: JNPR)

▶ 58.6% stock price increase

▶ Revenue increased by 4.8% from $4.5 billion to $4.7 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 10x to 16.3x for the 12 months ending Dec. 31

Physical Security Weaker Performers

Kratos Defense & Security (Nasdaq: KTOS)

▶ 29.3% stock price decline

▶ Revenue increased by 7.8% from $747.7 million to $806.3 million over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple decreased from 49.5x to 36.7x for the 12 months ending Dec. 31

Senstar Technology Corp. (Nasdaq: SNT)

▶ 23.2% stock price decline

▶ Revenue increased by 2.6% from $81.5 million to $83.6 million over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple decreased from 5.5x to 5.2x for the 12 months ending Dec. 31

Verint Systems (Nasdaq: VRNT)

▶ 21.8% stock price decline

▶ Revenue increased by 2.8% from $1.2 billion to $1.3 billion over the LTM period ending Oct. 31

▶ Enterprise value-to-EBITDA multiple decreased from 21.7x to 18x for the 12 months ending Dec. 31

Alarm.com (Nasdaq: ALRM)

▶ 18% stock price decline

▶ Revenue increased by 16.4% from $618 million to $719.3 million over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple decreased from 48.3x to 36x for the 12 months ending Dec. 31

Vivotek (TWSE: 3454)

▶ 16.1% stock price decline

▶ Revenue decreased by 4.8% from $199.6 million to $189.9 million over the last 12-month (LTM) period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple increased from 17.5x to 25.5x for the 12 months ending Dec. 31

Cybersecurity Weaker Performers

Everbridge (Nasdaq: EVBG)

▶ 54.8% stock price decrease

▶ Revenue increased by 25.9% from $271.1 million to $341.2 million over the LTM period ending Sept. 30

▶ Enterprise value-to-revenue multiple decreased from 20.6x to 8x for the 12 months ending Dec. 31

SolarWinds Corp. (NYSE: SWI)

▶ 52.4% stock price decrease

▶ Revenue increased by 0.1% from $1.2 billion to $1.9 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-EBITDA multiple decreased from 24.5x to 18.3x for the 12 months ending Dec. 31

Splunk (Nasdaq: SPLK)

▶ 31.9% stock price decrease

▶ Revenue increased by 12.9% from $2.4 billion to $2.6 billion over the LTM period ending Oct. 31

▶ Enterprise value-to-revenue multiple decreased from 12.4x to 8x for the 12 months ending Dec. 31

Mandiant (Nasdaq: MNDT)

▶ 23.9% stock price decrease

▶ Revenue increased by 6.5% from $940.6 million to $1.7 billion over the LTM period ending Sept. 30

▶ Enterprise value-to-Revenue multiple decreased from 5.8x to 4.4x for the 12 months ending Dec. 31

OneSpan (Nasdaq: OSPN)

▶ 18.1% stock price decrease

▶ Revenue declined by 3.4% from $215.7 million to $208.3 million over the LTM period ending Sept. 30

▶ Enterprise value-to-Revenue multiple decreased from 3.2x to 2.8x for the 12 months ending Dec. 31

Keep reading for a 2021 M&A overview…

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