After the Sourcefire (FIRE) Deal: Who Could be Next in the IT Security Space? PANW & FTNT

On Tuesday, small cap security software stock Sourcefire, Inc (NASDAQ: FIRE) surged after Cisco Systems, Inc (NASDAQ: CSCO) announced it would acquire the company in a deal worth $2.7 billion, pretty much leaving mid cap stocks Palo Alto Networks Inc (NYSE: PANW) and Fortinet Inc (NASDAQ: FTNT) left for investors or acquirers in the IT or cybersecurity space. Sourcefire itself is a top maker of next-generation intrusion prevention software, firewalls and malware protection for companies and government agencies. The deal puts Cisco even deeper into the key network security field with observers saying it could foreshadow other acquisitions in the space by other large cap IT players. Moreover, Christopher Young, senior vice president of Cisco's security group, was quoted in Investors Business Daily as saying:

"We have adversaries out there that are constantly trying to figure out ways to defeat us, so as that landscape changes we will respond — if we have to respond organically, if we have to respond inorganically."

What You Need to Know About Palo Alto Networks Fortinet

With the above in mind, here is what you need to know about mid caps Palo Alto Networks and Fortinet:

Palo Alto Networks. Offering a network security platform that allows enterprises, service providers and government entities to secure their networks, Palo Alto Networks pioneered the next generation of network security and has more than 12,500 enterprise, government and service provider customers worldwide - including many Fortune 500 companies. Palo Alto Networks' CFO recently said the enterprise network security segment is "robust." However, Palo Alto Networks is starting to hit bumps in its growth story that was not helped with its latest earnings report where investors were "expecting a home run quarter while the company scored a single or a double" in the words of one analyst. Specifically, the company reported a loss of $7.3 million, or 10 cents per share, compared with a profit of $0.8 million a year earlier. On Tuesday, Palo Alto Networks fell 2.04% to $48.54 (PANW has a 52 week trading range of $39.08 to $72.61 a share) for a market cap of $3.45 billion plus PANW is down 7.8% since the start of the year and down 8.6% over the past year (Note: The company went public last July). It should also be noted that more than 2,800 August 55 calls recently traded, but the company also has a rather high forward P/E of 121.35 with the next earnings report scheduled for September 9th.

Fortinet. A worldwide provider of network security appliances and a market leader in unified threat management (UTM), Fortinet's customers include enterprises, service providers and government entities worldwide - including the majority of the 2011 Fortune Global 100. The last time Fortinet reported earnings, the numbers were in line with its pre-announcement early in April, but the guidance for the current period fell short of what Wall Street had expected due to a few large service provider deals not closing and weakness in particular geographies. Nevertheless, many analysts remained upbeat but for what its worth, CNBC's Mad Money host recently said: "I'm a seller. I feel bad for anyone holding this stock." On Tuesday, Fortinet rose 4.84% to $21.43 (FTNT has a 52 week trading range of $16.47 to $28.23 a share) for a market cap of $3.47 billion plus FTNT is up 2.4% since the start of the year, down 8.7% over the past year and up 153% since November 2009. Fortinet will next report earnings on July 30th and it has a trailing P/E of 56.39 along with a forward P/E of 35.72.

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Share Performance: Sourcefire, Inc vs. Palo Alto Networks and Fortinet

Here is a quick look at the short term and longer term performance of Sourcefire verses Palo Alto Networks and Fortinet:

As you can see, Sourcefire and Fortinet have been longer term winners for investors while the short term performance for the latter has been flat verses the former.

The Bottom Line. If you are looking to speculate on more acquisitions in the IT security space, Palo Alto Networks and Fortinet would be good bets, but more conservative investors might want to stay away and stick to larger cap IT plays.