You may think the time is right to move into cybersecurity stocks, if you’re reading this IBD investing primer. Cybersecurity is in the news amid a big jump in ransomware attacks.
The IBD Computer-Software Security group ranks No. 11 out of 197 industry groups tracked, improving from No. 39 three weeks ago.
“As companies reported results for the second quarter, we saw evidence that digital transformation, expansion of attack surfaces, an elevated threat environment, and widely publicized security incidents continue to drive accelerated demand for next gen security,” Goldman Sachs analyst Brian Essex said in a Sept. 13 note to clients. “We also saw confirmation that we are in the middle of one of the most substantial firewall-related spending cycles we’ve seen in years.”
The rise of cryptocurrency Bitcoin may be tied to a spike in ransomware attacks. In ransomware attacks, hackers take over computer systems, encrypt files and demand digital payment to restore access to critical data.
Cybersecurity stocks rallied Aug. 24 after Palo Alto Networks (PANW) reported better-than-expected earnings. In addition, CrowdStrike Holdings (CRWD) was added to the Nasdaq-100 index.
At an analyst day Sept. 13, Palo Alto management provided three-year guidance. It forecast fiscal 2024 billings of $10 billion and revenue of $8 billion, exceeding consensus expectations by 12% and 8%, noted a BMO Capital Markets report.
Congress is expected to pass legislation funding infrastructure projects. The legislation will include funding for federal, state and local cybersecurity infrastructure.
Meanwhile, the cybersecurity market will grow 11% in 2021 to $73.54 billion, estimates research firm Gartner. Morgan Stanley recently surveyed chief security officers.
“Among the CSOs surveyed, 92% cited a heightened cyber threat environment as a primary reason for accelerating security spend in 2021, suggesting that recent cyberattacks are starting to impact enterprise budget decisions,” the report said.
Cybersecurity Stocks With High Composite Ratings
Fortinet (FTNT) stock, CrowdStrike, Mimecast (MIME), Zscaler (ZS) and Palo Alto Networks are among cybersecurity stocks with Composite Ratings above 90.
The Composite Rating is a blend of the other five IBD stock ratings: the earnings per share or EPS Rating, Relative Price Strength Rating, Accumulation/Distribution Rating, Industry Group Relative Strength Rating and the SMR Rating.
The latter measures sales growth, profit margins and return on equity. The all-encompassing Composite Rating helps investors easily measure the quality of a stock’s fundamental and technical metrics.
CrowdStrike stock fell after it reported July quarter earnings that topped views but growth in annual recurring revenue, or ARR, disappointed.
CRWD stock recently dropped off the IBD Leaderboard. It’s IBD’s curated list of leading stocks that stand out on technical and fundamental metrics. CrowdStrike stock was featured as an IBD Stock of the Day.
Zscaler ranks No. 20 in the IBD 50 roster of growth stocks. Zscaler reported fiscal fourth quarter earnings that topped expectations.
Hot Cybersecurity Startups Eye IPOs
Private equity firms continue to eye cybersecurity stocks. Thoma Bravo in April agreed to buy Proofpoint in an all-cash $12.3 billion deal.
SentinelOne (S)’s initial public offering raised $1.2 billion. SentinelOne, which competes with CrowdStrike, recently reported earnings for the first time as a public company.
Meanwhile, analysts say Netskope, Illumio and Menlo Security are among cloud security startups that could launch IPOs. Netskope in early July raised $300 million at a valuation of $7.5 billion.
Analysts say a new wave of startups seems to be taking share from industry incumbents. They include Cybereason, Exabeam, Vectra AI and iBoss.
“Illumio just completed a Series F round for $225 million of 100% primary capital led by Thoma Bravo, where Illumio now sports a $2.75 billion post-round valuation,” said Needham analyst Alex Henderson in a report.
Darktrace (DARK) launched its IPO on the London stock exchange in April. Darktrace utilizes self-learning artificial intelligence tools in security automation.
Consolidation may be coming in the cybersecurity industry. Okta in early March acquired privately held Auth0 in a $6.5 billion, all-stock deal. Also, Okta (OKTA) is expanding into new security markets to take on CyberArk Software (CYBR) and SailPoint Technologies (SAIL).
Microsoft Stock A Big Player In Cybersecurity
Also, Microsoft (MSFT) disclosed that its cybersecurity revenues top $10 billion annually. With 400,000 customers, Microsoft’s computer security franchise is growing at more than 40%, the company said.
Microsoft in July acquired RiskIQ, a security threat management company. Bloomberg reported that Microsoft paid around $500 million. Microsoft also bought CloudKnox Security in July.
In addition, Microsoft is integrating more security tools into its cloud-based Office 365 software. As it expands cloud-based security services, Microsoft could pressure more industry incumbents, such as Okta, CrowdStrike, and Splunk (SPLK).
“Microsoft is clearly pitching itself as offering a full security suite, a competitive advantage as customers increasingly want a unified view of threats,” UBS analyst Karl Keirstead said in a recent note to clients.
Cybersecurity Stocks: Relative Strength Ratings
Also, one key IBD technical measure for cybersecurity stocks are Relative Strength Ratings.
Further, CrowdStrike uses machine learning and a specialized database to detect malware on laptops, mobile phones and other devices that access corporate networks. In addition, many software companies are using artificial intelligence to get a competitive edge.
In addition, Zscaler is the biggest provider of cloud-based web security gateways that inspect customers’ data traffic for malware.
SailPoint, an identity management software maker, is among companies that garner more than 10% of revenue from government agencies.
Coronavirus Outbreak Boosted Demand For Cloud Security
Other cybersecurity firms with a sizable government business include Tenable Holdings (TENB), Rapid7 (RPD) and CyberArk. Tenable in February acquired France-based Alsid, which focuses on identity access management.
Rapid7 and Qualys (QLYS) specialize in vulnerability management services.
Amid the rapid global spread of the coronavirus called Covid-19, many companies instructed employees to work from home. That has increased demand for computer security products that support remote work.
The coronavirus emergency and shift to remote work has accelerated the growth of cloud-based network security. So the industry now has a new term for the infrastructure that supports distributed workers and branch offices.
It’s spelled SASE — pronounced “sassy” — and it stands for Secure Access Service Edge.
Cybersecurity Stocks: Remote Work Increases Amid Pandemic
As remote workers access company data via the internet, many businesses are setting up virtual private networks, or VPNs. Some are buying laptops with preinstalled security software.
“We believe corporations are facing challenges in terms of VPN capacity, and protecting workers adequately with next-generation network and endpoint security offerings,” William Blair analyst Jonathan Ho said in a report to clients.
He added that “intensifying email and phishing campaigns, identity access management, and control over software applications” are other security issues.
However, industries hard hit by the coronavirus pandemic will spend less on security software. They include airlines, hotels, retail and restaurants.
Meanwhile, one view is that mergers and acquisitions will pick up.
“The cloud has disrupted everything, which presents both threat and opportunity,” Jefferies analyst Brent Thill said in a recent note. “The cyber market is riper than ever for ongoing consolidation. Many smaller vendors are attempting to solve the same problems, larger vendors are looking to create security suites, and financing rates are at all-time lows.”
Zscaler, Qualys and Ping Identity Holdings (PING) were each featured recently as the IBD Stock of the Day.
In addition, while cybersecurity stocks often get a boost from well-publicized cyberattacks, the impact can be short-lived.
SD-WAN Technology Changes Security Needs
Corporate America has hiked tech spending on security aiming to protect intellectual property as well as consumer privacy. Hackers continue to steal credit card data and intellectual property.
Spending on security technologies has evolved as companies shift business workloads to cloud computing service providers. Amazon Web Services, part of Amazon.com (AMZN), is the biggest cloud services firm. Amazon looms as a potential rival as it builds more security tools into its cloud services.
Also, Fortinet competes with Palo Alto Networks and others in the firewall security market. Firewalls reside between private networks and the internet. They block unauthorized traffic and check web applications for malware.
As large companies shift to off-premise cloud computing services, one view is that firewall technology will play a lesser role. Fortinet has targeted software-defined wide area networks, or SD-WANs, an emerging computer networking technology.
Aiming to catch-up in SD-WAN technology, Palo Alto Networks acquired startup CloudGenix.
Cybersecurity Products Battle Ransomware, Phishing
Cybersecurity stocks span a wide-range of products and services. In addition, some security vendors are shifting to software-based subscription business models from selling hardware appliances.
Further, it behooves an investor to know which cybersecurity stocks address ransomware, phishing or other kinds of cyberattacks. Proofpoint specializes in email and data-loss protection.
Cloud security vendors include Zscaler, Palo Alto Networks, Okta, Mimecast and Rapid7.
Hackers often aim to compromise networks by targeting employees or management who have administrative access. CyberArk manages privileged accounts. In addition, Okta provides identity management services.
To slow down hackers, more companies are focusing on internal security threats though a strategy known as Zero Trust.
In addition, traditional security measures aim to keep the bad guys out of corporate networks. Further, network firewalls focus on intruders from the public internet.
Zero Trust cybersecurity models focus on internal threats, such as hackers stealing someone’s security credentials. Security firms verify the identity of network users and limit access to applications.
CrowdStrike, Okta, Netskope and Proofpoint recently formed a Zero Trust alliance.
Targeting Zero Trust security, Cisco Systems (CSCO) in 2018 acquired Duo Security for $2.35 billion.
Artificial Intelligence Changing Cybersecurity Market
Also, many fast-growing cybersecurity firms are in the endpoint market. Their tools detect malware on laptops, mobile phones and other devices that access corporate networks.
Further, CrowdStrike’s initial public offering in June, 2019 raised $612 million, one of the largest cybersecurity offerings. CrowdStrike’s rivals include VMware‘s (VMW) Carbon Black, Palo Alto, FireEye (FEYE) and startup Cybereason. Private equity firms Blackstone and ClearSky recently invested $400 million in FireEye.
In addition, state-sponsored hackers and cybersecurity firms are both using artificial intelligence to get an edge.
Artificial intelligence should improve computer security tools by speeding up incident responses. It could help thwart email-delivered ransomware or swarming botnets that knock out access to websites.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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