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 ransomware attacks on Colonial Pipeline and meat producer JBS.
Now cybersecurity officials worldwide are racing to assess the damage from a new ransomware linked to Russian cyber-gang REvil. The ransomware attack focused on companies that use software from Kaseya VSA.
The rise of cryptocurrency Bitcoin may be tied to a spike in ransomware attacks. Digital ransoms are often paid in Bitcoin. In ransomware attacks, malicious software locks up a victim’s computers until a ransom is paid.
Cybersecurity Stocks With High Composite Ratings
The cybersecurity market will grow 11% in 2021 to $73.54 billion, estimates research firm Gartner. The Black Hat security conference will be held in-person in Las Vegas from Aug. 3 to Aug. 5.
Fortinet (FTNT) stock, CrowdStrike Holdings (CRWD), Proofpoint (PFPT) Mimecast (MIME) and Palo Alto Networks (PANW) are among cybersecurity stocks with Composite Ratings above 85.
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 reported first-quarter earnings and revenue that topped estimates on June 3. Zscaler (ZS) stock popped after its fiscal third-quarter earnings and outlook topped expectations. CrowdStrike ranks No. 20 in the IBD 50 roster of growth stocks. Zscaler ranks No. 48.
Palo Alto reported fiscal third-quarter earnings that topped estimates. On its earnings call, Palo Alto said it is no longer exploring a new equity structure.
Hot Cybersecurity Startups Eye IPOs
Private equity firms continue to eye the sector. Thoma Bravo in April agreed to buy Proofpoint in an all-cash $12.3 billion deal.
Among new developments: SentinelOne (S)’s initial public offering raised $1.2 billion. SentinelOne competes with CrowdStrike and others.
Meanwhile, analysts say Netskope and Menlo Security are among cloud security startups that could launch IPOs. Analysts say a new wave of startups seems to be taking share from industry incumbents. They include Illumio, Cybereason, Exabeam and iBoss.
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 (OKTA) in early March acquired privately held Auth0 in a $6.5 billion, all-stock deal. Also, Okta is expanding into new security markets to take on CyberArk Software (CYBR) and SailPoint Technologies (SAIL).
Okta stock fell after its July quarter outlook came in below expectations amid the Auth0 acquisition.
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 could pressure more industry incumbents, such as Okta and CrowdStrike, as it expands cloud-based security services.
“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: Covid Pandemic Speeds Shift To Cloud Services
The big picture: the coronavirus outbreak and shift to remote work accelerated a shift to cybersecurity services delivered via cloud computing infrastructure. CrowdStrike and Zscaler were among cloud-based security firms to get a boost.
Cybersecurity stocks rallied in mid-December amid reports that Russian hackers accessed U.S. government computer networks via network management software provided by SolarWinds (SWI). Government agencies and companies exposed to the “Sunburst” cyberattack continue to assess damage.
The rally in cybersecurity stocks has eased. The big questions: how much of a spending boost on network monitoring/threat detection will result from the SolarWinds breach and what cybersecurity stocks stand to gain.
FireEye (FEYE), which garners some 15% of revenue from government customers, declined to quantify the impact of the Sunburst cyberattack on its services business when it reported fourth-quarter earnings.
CrowdStrike stock and Zscaler have 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.
Cybersecurity Stocks: Relative Strength Ratings
Also, one key IBD technical measure for cybersecurity stocks are Relative Strength Ratings. According to IBD Stock Checkup, CrowdStrike holds a RS Rating of 90 out of a possible 99.
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, at its recent Fal.Con 2020 virtual user conference, CrowdStrike announced plans to expand from endpoint security into protecting cloud workloads.
Zscaler’s Relative Strength Rating comes in at 82. 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.
“We are still in the early innings of a paradigm shift to cloud security architecture, including SASE and Zero Trust,” Credit Suisse analyst Brad Zelnick said in a recent report to clients.
Cybersecurity Stocks: More M&A On The Way?
Research firm Gartner forecasts that the corporate computer security market will grow more than 10% on average annually through 2024 versus 3% growth for information technology department spending.
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.
Cloud Giants Amazon, Microsoft Loom As Threat
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.
Further, extortion is on the rise. Hackers are increasingly using ransomware. They demand payments to let companies regain access to their own information.
Food-delivery service DoorDash said in September that a security breach exposed the personal data of about 4.9 million customers, merchants and delivery workers.
Privately held DoorDash joined Quest Diagnostics (DGX), Marriott International (MAR), Equifax, Yahoo, Anthem (ANTM), Target (TGT) and others as tech security casualties.
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.
In addition, Microsoft is integrating more security tools into its cloud-based Office 365 software. Microsoft competes with cybersecurity firms such as Proofpoint, Splunk (SPLK), CrowdStrike, Okta, and startup Netskope.
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 recently 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 vendors include 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 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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