Published on May 27th, 2019 by Harvi Sadhra
This is a guest contribution by Harvi Sadhra of Hashtag Investing. Hashtag investing is an exclusive community for active investors to get real-time feedback and discover compelling stocks and strategies any time.
A wave of digital transformation is taking over the world.
Traditional ways of doing business are being upturned by new technology, whole new markets are sprouting overnight, and most of these disruptions rely on digital connections for their ultimate success. Increasingly, these digital connections run off the cloud.
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Digital transformation is now an unavoidable and critically important survival-and-growth strategy.
But the harsh reality is this: Digital connections make the world a smaller place, but unfortunately, they also make it riskier.
Digital crooks are constantly upping their game, and there has been a surge in cyber-attacks that are more sophisticated and stealthy, and have bigger damage payloads.
Front-of-mind for companies and security professionals is how to achieve the transformation safely.
Data regulations such as the General Data Protection Regulation (GDPR) in the European Union (EU), and the California Consumer Privacy Act now make businesses accountable for the data, and its privacy, of consumers.
The Irish Data Protection Commission has opened three separate statutory inquiries into whether Facebook breached EU rules governing the handling of data after a major hack in 2018. According to one estimate, Facebook could be fined as much as $1.63 billion.
So the new reality is that businesses must also manage their digital connections responsibly.
The remainder of this article examines 10 of the top cybersecurity stocks in no particular order.
Table Of Contents
- Looming Security Risks And Their Costs
- Cybersecurity Spending Trends
- Top Cybersecurity Stock #10 – Zscaler (ZS)
- Top Cybersecurity Stock #9 – CyberArk Software (CYBR)
- Top Cybersecurity Stock #8 – Proofpoint (PFPT)
- Top Cybersecurity Stock #7 – Qualys (QLYS)
- Top Cybersecurity Stock #6 – Mimecast Limited (MIME)
- Top Cybersecurity Stock #5 – Fortinet (FTNT)
- Top Cybersecurity Stock #4 – Check Point Software Technologies (CHKP)
- Top Cybersecurity Stock #3 – Rapid7 (RPD)
- Top Cybersecurity Stock #2 – Tenable Holdings (TENB)
- Top Cybersecurity Stock #1 – Palo Alto Networks (PANW)
- Final Thoughts
Looming Security Risks And Their Costs
Digital connections are growing at a breathtaking pace:
- The number of internet users grew from 1.2 billion in 2007 to 4.2 billion in 2017
- The number of IoT devices is expected to reach 25 billion by 2021
- By 2024, 4G networks will cover about 90% of the global population, with 5G networks covering about 40%
As the Internet has grown, so has the scope and damage from hacks.
Here are the 5 biggest data breaches of 2018 with the number of users affected:
- India’s Aadhar – 1.1 billion
- Mariott Starwood hotels – 500 million
- Exactis – 340 million
- MyFitnessPal – 150 million
- Quora – 100 million
According to a 2019 report from Accenture, the companies in the private sector alone could lose about US$5.2 trillion in foregone revenues between 2019 and 2023 due to cyber-attacks.
Corporations are therefore realigning their organizations and IT budgets with the new realities of risk, reputation, and regulation.
Cybersecurity Spending Trends
According to projections by Gartner, cyber spending was more than US$123 billion for 2018 and will grow by 10.8 percent per year to nearly US$170.5 billion by 2022.
These implications have not been lost on venture capital investors, who have invested nearly US$33 billion in 2,479 security startups since 2009.
Spending on security has shot up, galvanizing demand for solutions – as well as the prices of listed cyber-security stocks.
Given the potential for the industry, investing in cyber-security stocks from a long-term perspective should prove lucrative.
Top Cybersecurity Stock #10
Zscaler, Inc. (ZS)
Zscaler describes itself as the world’s largest security platform built for the cloud.
The company’s services include:
- Zscaler Internet Access – A solution that connects users to externally managed applications, including software-as-a-service applications and Internet destinations
- Zscaler Private Access Solution – Which is designed to provide access to internally managed applications, either hosted internally in data centers, and private or public clouds
- Zscaler Platform – A multi-tenant cloud security platform
Gartner’s Magic Quadrant has named Zscaler a leader in secure Web gateways for the 8th year running.
The company has launched an initiative for securing Enterprise IoT devices. It recently conducted a 30-day security survey of 270 devices from 153 different manufacturers and said “our threat research team saw an astronomical amount of traffic stemming from both corporate and personal IoT devices.”
The company’s market cap is US$9.42B. Valuations are pricey with Price/Sales at 34.10 and Price/Book at 34.02. The share price is trading near all-time highs.
However, its growth trajectory is undeniable. For the latest Q2 quarter, ZS reported a 74% year-on-year growth in billings. It announced EPS of $0.09 which handsomely beat estimates by $0.10 and revenue of $74.30M which beat by $8.05M.
ZS also upgraded its guidance for Q3 revenue and EPS.
According to Goldman Sachs, ZS is “benefiting from having the right technology at the right time.”
Investors in the company’s 2018 IPO are laughing their way to the bank, having nearly quintupled their investment at US$16 per share.
Top Cybersecurity Stock #9
CyberArk Software Ltd. (CYBR)
CyberArk provides software-based security solutions and services for organizations to safeguard and monitor their privileged accounts.
Its key products include:
- Core Privileged Access security
- Application Access manager
- Endpoint privilege manager
- Cyberark Privilege cloud
Its targeted security solutions include:
- Audit and compliance
- Security and risk management
- Industry solutions – healthcare, Federal, banking and insurance
The company’s current market cap is US$5.11B. It trades at a Price/Earnings ratio of an expensive 91.7, and the share price is trading near all-time highs.
The company reported a solid result for the first quarter of 2019. EPS of $0.56 beat by $0.15, while revenue of US$95.94M beat estimates by $3.51M. Cash flow from operations touched a record.
A comparison of CYBR’s profitability versus sector norms show that it outperforms on every count except asset turnover ratio.
Top Cybersecurity Stock #8
Proofpoint, Inc. (PFPT)
Proofpoint is a security and compliance company that provides cloud-based solutions to protect the way people work today. Its solutions enable organizations to protect their users from advanced attacks delivered via email, cloud, social media, and mobile apps, protect the information their users create from advanced attacks and compliance risks, and respond quickly when incidents occur.
Its products include email protection, advanced threat protection, security awareness training, cloud app security and Nexus platform.
The company has resorted to inorganic growth through a series of acquisitions, with two every year from 2013 through 2015, and one annually from 2016 through 2019 till date.
The last three acquisitions were all bigger than $100M in size:
- Cloudmark for $110M (2017)
- Wombat Security for $225M (2018)
- Meta Networks for $120M (2019).
Proofpoint has a market cap of $6.35B. Applicable valuation ratios are Price/Sales (8.03) and Price/Book (12.87). It does not pay a dividend.
The stock faces strong resistance in the range of $125-$126.
Top Cybersecurity Stock #7
Qualys, Inc. (QLYS)
Qualys provides a single cloud platform for IT, security and compliance across all the client’s global IT assets, designed from the ground up for digital transformation. It’s security built in, not bolted on, claims the company.
In February, Qualys acquired the software assets of Adya, Inc.
The acquisition will enable Qualys to provide companies of all sizes with the ability to consolidate administration of their Software as a Service (SaaS) applications into one console, manage license costs across SaaS applications, set and enforce security policies in one place and report and audit on all activity with a single tool.
The company’s market cap is $3.53B and the P/E Ratio is an expensive 61.3. It does not pay a dividend.
For the quarter ended March 2019 the company reported EPS of $0.49 which beat by $0.07 and revenue of $75.34M which beat by $0.42M and was up by 16.13%.
A comparison of QLYS’s profitability versus sector norms show that it outperforms on every count except asset turnover ratio.
The stock has been on a tear since February 2016, and is currently near all-time highs. Resistance looms around $97-98, after a 22.5% rise within the last 52 weeks.
Top Cybersecurity Stock #6
Mimecast Limited (MIME)
Mimecast’s mission is to make email safer for business through its cloud-based email security and compliance platform that bolsters cyber resilience. It has 34,400 customers globally.
Miimecast was named a leader in the Gartner Magic Quadrant for Enterprise Information Archiving for the fourth year in a row.
The company made two acquisitions in 2018 and another in 2019. The latest was the acquisition of Simply Migrate, a provider of archive data migration technology. “The acquisition of Simply Migrate will offer customers and prospects a faster, less expensive and more reliable path to the Mimecast cloud,” the company said.
During the fourth quarter ended March 2019 Mimecast reported EPS of $0.07 which missed by $0.01, and revenue of $92.19 which beat by $0.85M but grew strongly by 25.6% year-on-year.
For the full year 2019 Mimecast revenue grew 30% to $340.4M, and generated free cash flow of $37.4M, up from $11.9M in 2018.
It currently trades at a market cap of $2.79B. Its Price/Sales ratio is 8.03 while its Price/Book ratio is 16.32.
The stock has been on an uptrend since May 2016 and is trading off its 52-week high of $54.57.
Top Cybersecurity Stock #5
Fortinet, Inc. (FTNT)
Fortinet enables organizations to achieve a security-driven network with the high performance firewalls, an advanced product portfolio, and integration with its Security Fabric platform.
The Fortinet Security Fabric platform provides integration and automation across an organization’s security infrastructure, delivering protection and visibility to every network segment, device, and appliance, whether virtual, in the cloud, or on-premises.
Fortinet acquired Bradford Networks and ZoneFox in 2018.
Zonefox is a cloud-based solution that identifies insider threats, with the ability to distil billions of events into useful insights using machine learning and big data analytics, and to stop the threat before it spreads.
Bradford Networks’ technology will be integrated with Fortinet’s security fabric to enable large enterprises with the continuous visibility, micro-segmentation and access control technology they need to contain threats and block un-trusted devices (such as IoT) from accessing the network.
During the latest reported quarter Fortinet grew its revenue 18% year-on-year to $472.6M. It generated free cash flow of $191.1M versus $128.1M in the corresponding period last year. EPS of $0.46 beat estimates by $0.07, while revenue of $472.6M beat by $0.52M.
Fortinet has grown its free cash flow every quarter for the last four quarters.
The company said it witnessed strong overall demand, better-than-industry growth and strong customer demand for the Security Fabric platform.
The stock trades at a market cap of $13.23B and a high PE ratio of 40.86. It does not pay a dividend.
Fortinet’s growth and profitability metrics are overwhelmingly superior to the median sector performance.
Top Cybersecurity Stock #4
Check Point Software Technologies Ltd. (CHKP)
Checkpoint is a provider of cyber security solutions to over 100,000 organizations of all sizes worldwide including corporate enterprises and governments. It offers a multilevel security architecture with its Gen V advanced threat prevention that protects all networks, cloud and mobile operations of a business against all known attacks including 5th-generation cyber attacks.
In October 2018 Checkpoint acquired Israeli cyber-security company Dome9.
“Dome9’s platform will add rich cloud management and active policy enforcement capabilities to Check Point’s Infinity Architecture, particularly complementing the CloudGuard security product family and make our broad solution even more differentiated in the rapidly moving Cyber Security environment,” said Gil Shwed, Check Point CEO, at the time.
Last month, analysts at BMO Capital enhanced their target price on Checkpoint from $120 to $125 based on likely growth in the free cash flow it generates. Cowen have a similar price target of $120.
Checkpoint has a market cap of US$17.26B and trades at a PE ratio of 22.98.
It underperforms the sector on most metrics of growth, but is leagues ahead on profitability.
The stock has been in a long-term uptrend since 2013, but in recent months has faced tremendous resistance around the $125 level. It is likely that it will consolidate between $85 – $125 for some time before making a fresh move.
Top Cybersecurity Stock #3
Rapid7, Inc. (RPD)
Rapid7, Inc. provides analytics solutions for security and information operations. Its vulnerability management solutions include InsightVM and Nexpose, which enable customers to assess and remediate their overall exposure to cyber risk; InsightAppSec, an insight platform based solution; AppSpider, an application security testing solution; and Metasploit, a penetration testing software solution.
Like its peers, Rapid7 too favors the acquisition route to enhance growth and technological expertise.
It made three acquisitions , one each in the last three years from 2017 through 2019. The acquired businesses were Komand (2017), tCell (2018) and NetFort (April 2019).
The last-named company provides end-to-end network traffic visibility and analytics across cloud, virtual and physical networks. Rapid7 plans to bring NetFort’s network monitoring, visibility and analytics capabilities into its Insight cloud to help customers securely advance.
Rapid7 has a market cap of $2.47B and trades at Price/Sales ratio of 9.21.
Between 2015 and 2018, total revenue at Rapid7 has grown from $110.53M to $244.09M. However, net income (loss) has remained more or less unchanged in the range of (-) $50M to (-) $55M through the same period.
The company does not pay a dividend.
After touching a low of $10.71 in November 2016, the Rapid7 stock achieved a high of $57 this month. That means the stock more than quintupled in the space of 18 months.
Top Cybersecurity Stock #2
Tenable Holdings, Inc. (TENB)
Tenable describes itself as the Cyber Exposure company with a goal to provide insight into cyber risk like never before.
Tenable.io, the world’s first Cyber Exposure platform, arms IT Security with the visibility to see their entire cyber attack surface at all times (from IT to Cloud to IoT to OT) and arms the Chief Information Security Officer (CISO), C-suite and Board of Directors with the insight to focus on the issues which matter most and make better strategic decisions.
The platform provides accurate, actionable data needed to identify, investigate, and prioritize the remediation of cyber-vulnerabilities in the modern IT environment, in other words, assessing and remedying vulnerability.
In 2016 Tenable acquired FlawCheck, which provided continuous scanning for Docker containers, an innovative way to protect code by isolating it within a computer, so it can’t be used for anything but its intended purpose.
Tenable has a market cap of $2.84B and trades at a Price/Sales ratio of 7.25, and a Price/Book of 22.50.
Between 2015 and 2018, the company’s annual revenue grew from $93.47M to $267.36M. Though gross profit surged from $82.55M to $224.19M in the same period, net income (loss) moved up only marginally from (-) $83.76M to (-) $73.52M.
For the latest reported quarter ended April 2019, Tenable reported EPS of (-) $0.13, which beat estimates by $0.05, and revenue of $80.3M, which beat by $1.93M, and was up 36% year on year.
“By combining forecast for connected enterprise IoT devices, cloud deployments, container instances and other new and traditional assets, we believe that our total addressable market reaches $16 billion this year,” said Amit Yoran – President, CEO & Chairman, on the earnings call.
The company does not yet pay a dividend.
Top Cybersecurity Stock #1
Palo Alto Networks, Inc. (PANW)
Palo Alto Networks calls itself the global cyber-security leader, with more than 60,000 customers in 150+ countries across multiple industries. These include over 85 of the Fortune 100.
The company’s pioneering Security Operating Platform safeguards digital transformation with continuous innovation that combines the latest breakthroughs in security, automation, and analytics.
Its next-gen Firewall is a fully automated platform for Enterprise that instantly finds and stops attacks.
Palo has cloud security solutions tailor-made for public clouds such as AWS, Azure, Oracle and Alibaba and for SaaS applications such as Aperture.
Palo’s Cortex is the industry’s only open and integrated AI-based continuous security platform that significantly improves security outcomes through automation and unprecedented accuracy.
Palo Alto has a market cap of $20.6B and trades at a Price/Sales ratio of 7.75 and Price/Book ratio of 19.93. It does not pay a dividend.
In terms of growth, the company outperforms the sector on most parameters. However, in terms of profitability it is a sector underperformer.
The stock is currently off its recent 52-week high of $260.63, but is likely still within an uptrend.
Final Thoughts
It is clear that most of the above stocks are trading at multi-year highs, and there is that fear of buying the market top.
However, security budgets are likely to continue to be boosted globally as businesses grapple with the increased sophistication and scale of cyber-attacks. For example, analysts at Cowen believe that the share of security budgets dedicated to cloud-based solutions will more than double in the next two years.
Moreover, the bottom line is this: one more data breach or hack of large enough proportions could generate investor interest afresh in these stocks and push them into a new bull orbit beyond their recent highs.
