McAfee Hacks Into Success

Less isn't always more. But in the case of McAfee(MFE), the No. 2 provider of antivirus software, less has been a winning strategy.

Since shedding its former moniker -- Network Associates -- and three underperforming business units in 2004, the Silicon Valley-based company has seen its stock appreciate by more than 60% while profit and revenue in the first quarter jumped by more than 30% on a pro forma basis. Once a weak player in two of its three lines of businesses, McAfee has slimmed down to focus on its core strength -- Internet security software -- and is getting good reviews from much of Wall Street in the process.

It hasn't all been smooth sailing. Archrival Symantec(SYMC) has been strengthening its hold on the fast-growing consumer market, while Tokyo-based Trend Micro is winning share in the commercial market, according to NPD Group. And privately held WebRoot, NPD says, is making a big splash in the nascent market for antispyware.

What's more, the fight for the $5.4 billion security software market is about to get even rougher.

Symantec shareholders on Friday approved the acquisition of Veritas(VRTS) to form a security and storage software giant. And Microsoft(MSFT), the world's largest software company, is slowly moving into the market for Internet security, leading some analysts to wonder if McAfee can survive the onslaught in the long term.

For now, though, Wall Street is betting that McAfee can continue to grow. Analysts polled by Thomson First Call have a median price target of just under $30, while some targets are higher, including one by Sarah Friar of Goldman Sachs, who sees "upside to the mid-$30s." On Friday, the stock closed at $25.57.

McAfee's transition to a "pure play" flies in the face of an overall trend in software -- away from so-called best-of-breed players, which specialize in a relatively narrow set of skills, toward providing a much broader set of software and services. Giant software companies like Oracle(ORCL) and IBM(IBM) exemplify the trend at the highest level, but even smaller players like Lawson Software(LWSN) are swallowing competitors in an effort to add new tricks to their repertoire.