Can Carbon Black Compete?

The information security market keeps growing as customers struggle to adapt to new threats and risks while maintaining a mass of existing technologies, solutions and practices.

Companies have done fairly well protecting their networks but their ability to control the devices attaching to the network is limited. These “endpoints” must be made secure in order for an overall security strategy to be successful.

Here is a great quote from The Register's John E Dunn from 2017 that sets the stage well:

With humble viruses long gone and even the term “malware” starting to morph, security clients now behave more like sensors for multi-layered, centralised security systems encompassing not only defence and remediation, but response, forensics, and even data security.

This change might seem like a natural development that parallels how many technologies have evolved since the turn of the millennium, but within cybersecurity it reflects deeper currents. The most important of these is the almost supernatural rise of the professional criminal developing malware at industrial scale. This has not only forced security companies to innovate at an uncomfortable pace, but to integrate the multiple layers of protection necessary to counter such dark innovations.

At the same time, what is being protected now extends way beyond the desktop Windows PC or server. Whether they are laptops or smartphones taken beyond the protection of the firewall perimeter or any one of a multitude of Internet of Things devices, the simpler age of PC security has given way to that of the modern “endpoint.”

Carbon Black (Nasdaq: CBLK) is a niche player in this expanding part of the IT security space. They are expected to price their IPO tonight (they increased the range to $17-19.)

Despite being perceived as a "second-tier player" in the IT security space, our IV suggests that there a post-IPO share price of $32 based on 35% growth and a 35x earnings multiple. (see below)

The big question for CBLK investors is how the company will compete in an increasingly crowded market with both large established players who offer multiple products and other effective niche players like CrowdStrike.

Having a channel-based strategy is what gives Carbon Black a chance. Their network of partners allows them to "punch above their weight" but their strategy is not unique enough to be immune to disruption. Several competitors have effective channel programs with pervasive reach.

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Disclosure: We do not have any vested interest in the shares of this stock at the time of writing and publication. We may however take a position post publication and are not under any obligation to ...

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