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TechWeek: Internet Security Leak

A couple of slaps administered by the sell-side took a bit more steam out of Internet Security Systems (ISSX) this week, and the stock's bullish run has slowed to a walk.

Since the network security provider reported third-quarter earnings in late October, its shares have traded in near tandem with the Nasdaq, gaining just 7%. Compare that with the spring and summer, when its stock jumped 45% between mid-April and mid-September, outperforming the index by a factor of three.

The flattening curve is no mystery. Investors are wondering if most of the good news this company will deliver for a while is already priced in. Jefferies analyst Katherine Egbert, for example, downgraded the stock to hold this week, saying, "We think that current consensus for another year of 14% top-line growth in 2006 reflects an unrealistic level of optimism."

Moreover, Egbert and others say that Check Point Software Technologies (CHKP), ISS's larger rival, could become significantly more competitive as it enters ISS' core intrusion prevention business via the $225 million acquisition of Sourcefire.

"CheckPoint is a formidable competitor and one ISS has not had to deal with head on,' says Gartner analyst Amrit Williams. But CheckPoint, he adds, will have to prove it can integrate Sourcefire's open-source technology into its more conventional business model.

Also expanding efforts in enterprise security are Computer Associates (CA), Juniper Networks (JNPR)and Cisco Systems (CSCO)

ISS made a name for itself in the first part of the decade, becoming a leader in the market for intrusion detection technology to alert techies that their corporate networks were under attack. But by 2003, the market flattened and the company changed course, moving from software-based detection products to appliance-based intrusion detection systems, or IPS.

The company's technology gets high marks from analysts, and leads the pack with an approximate 28% share of the nearly $500 million market for intrusion prevention and detection, according to market research firm IDC. And driven by the need to comply with increasingly stringent government and industry regulation, the market will reach $879.3 million in 2006, IDC predicts.

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