Cybersecurity Stocks To Buy And Watch

You may think the time is right to move into cybersecurity stocks as private equity firms target the sector with acquisitions. Buzz surrounding generative artificial intelligence also has impacted cybersecurity stocks.

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As of July 28, the IBD Computer Software-Security group ranked No. 35 out of 197 industry groups that IBD tracks. The group ranked No. 15 three weeks prior to that.

The Black Hat security conference runs from Aug. 5 to Aug. 10.

Under new cybersecurity rules, the Securities and Exchange Commission will require companies to report significant hacks within four business days of determining whether the incident will have a material impact on the business.

“We expect a lot more 8-Ks, more proactive security spending to limit ‘material’ cybersecurity incidents and intriguing conversations with cyber policy insurers,” Raymond James analyst Adam Tindle said in a note to clients on the new SEC rules.

Cybersecurity Stocks: AI A Double-Edged Sword

Meanwhile, both computer security firms and hackers are expected to make use of generative AI tools. Here’s a look at the AI cybersecurity battle.

“We view generative AI as a force multiplier and a positive for cyber vendors as it amplifies the ability of the masses to make proper threat assessments in a timely manner,” said a recent Citigroup report.

Cybersecurity firms such as Palo Alto Networks (PANW) are among AI stocks to watch.

In its latest forecast, research firm Gartner predicted that enterprise information security spending will reach $186 billion in 2023 and will grow to $278 billion in 2027, equating to an 11% compound annual growth rate. That’s better than most information technology spending categories.

Bank of America expects market share to shift to cybersecurity firms with cloud computing platforms.

“Small vendors still carry weight in this market, especially ones that offer differentiated solutions, however, we view cloud-based vendors at scale like Microsoft (MSFT), CrowdStrike Holdings (CRWD), Palo Alto Networks and potentially Zscaler (ZS), as having the greatest likelihood of providing investors with the highest long-term value creation,” BofA analyst Tal Liani said in a report.

Cybersecurity Earnings Reports Mixed

Fortinet (FTNT) reported first-quarter results that topped analyst estimates. Shares in Zscaler advanced after it pre-announced preliminary fiscal third-quarter results.

Shares in Palo Alto Networks jumped on fiscal third-quarter earnings and revenue that topped Wall Street targets. Large customer growth for cloud-based services was a bright spot for PANW stock.

Meanwhile, PANW stock has replaced Dish Network (DISH) in the S&P 500 index, S&P Dow Jones Indices announced. Another bright spot: Palo Alto Networks belongs to the IBD Leaderboard.

CrowdStrike reported earnings and revenue that topped estimates but growth in a key metric slowed.

Other Cybersecurity Players Fall On Earnings

SentinelOne (S) reported a smaller-than-expected first-quarter loss, but its revenue outlook missed Wall Street targets.

Tenable Holdings (TENB), Cloudflare (NET) and Check Point Software Technologies (CHKP) fell on their earnings releases.

Billings, a key sales growth metric, proved disappointing for TENB stock and CHKP stock. NET stock fell on a weak revenue outlook.

At the RSA cybersecurity conference in San Francisco in late April, one big topic was whether companies will prioritize computer security in 2023 as they reassess information technology budgets. Artificial intelligence also was a big issue.

Competition is rife. Microsoft, already a strong rival, aims to integrate artificial intelligence tools into its security platform. Called Microsoft Security Copilot, the platform uses a new AI assistant.

Will Funding To Feisty Startups Slow Down?

Analysts say a new wave of startups is taking share from industry incumbents. They include Netskope, Wiz, Snyk and Illumio. Analysts say others to watch include Venafi, Recorded Future, Noname Security, Obsidian Security, Deep Instinct and Skyflow. The startups pressure incumbents into higher research and development spending.

Funding continues to go to cybersecurity startups. Cloud security firm Wiz recently raised $300 million at a $10 billion valuation. The big question is whether the banking crisis will slow venture capital investment in the sector.

“The cybersecurity startup ecosystem is flooded, with 3,000 security vendors reported by CyberDB,” Baird analyst Shrenik Kothari said in a note. “Despite high demand for cybersecurity tools, the vast number of vendors exacerbates complexity and tool sprawl, making it challenging for customers to review and adopt new technologies. Many subscale startups may fail or face financial difficulties as the market struggles to absorb rapid innovation.”

Cybersecurity Stocks And Cloud Computing

Cloud computing giants are changing the cybersecurity market with their own offerings, acquisitions and software marketing deals. Meanwhile, Microsoft poses the biggest threat to incumbents in the sector as it sells multiple products to companies in discounted deals.

According to a Morgan Stanley survey of chief information officers in 2022, cloud computing and security software remained at the top of priority lists, followed by business intelligence/analytics, digital transformation and artificial intelligence.

In a recent initiation on cybersecurity stocks, Goldman Sachs analyst Gabriela Borges pointed to long-term trends.

“Multi-product platforms have gained momentum and are closer to solving the challenge of staying innovative in subsegments historically defined by boom and bust product cycles,” said Borges.

She added: “The industry is less cyclical as mix shifts away from hardware and toward SaaS (software-as-a-service). There are natural extensions for growth for industry incumbents that would otherwise be facing market saturation. They include Secure Access Service Edge  for network security leaders and cloud workload protection platforms.”

Cybersecurity Stocks: Private Equity Firms

Private-equity firms remain active. Thoma Bravo on Oct. 11 agreed to buy ForgeRock for $23.25 a share in an all-cash deal valued at about $2.3 billion. The deal represented a 53% premium to ForgeRock’s closing share price on Oct. 10. The deal is expected to close in the first half of 2023. FORG stock had retreated 65% in 2022 prior to the deal.

Earlier, Thoma Bravo acquired Ping Identity Holdings (PING) for $2.8 billion. Thoma Bravo also has acquired cybersecurity firms SailPoint Technology, Proofpoint, Sophos and Barracuda. The private equity firm has invested in cybersecurity startups, such as Illumio.

Also, private-equity firm Permira in May completed its purchase of Mimecast for $5.8 billion.

Private equity firm Vista Partners, a long-standing investor in KnowBe4 (KNBE), on Oct. 13 acquired KnowBe4 in a $4.6 billion leveraged buyout.

Federal Market A Tailwind?

Google-parent Alphabet (GOOGL) last year acquired cybersecurity firm Mandiant in an all-cash $5.4 billion deal. Mandiant is now part of Google’s cloud computing business.

Further, Google in 2022 acquired Siemplify, a security orchestration, automation and response provider, for around $500 million.

Still, some computer security firms could get a boost from new federal government initiatives.

The Cyber Incident Reporting Act of 2021 requires agencies, federal contractors and critical infrastructure operators to notify the Department of Homeland Security when a data breach is detected, a significant step in building security.

Some cybersecurity firms aim to use artificial intelligence to get an edge on hackers.

When the bear market eases, investors might consider the Global X Cybersecurity ETF (BUG) for a more broad exposure to the sector.

Further, Congress has finally passed legislation funding infrastructure projects, which is expected to include funding for federal, state and local cybersecurity infrastructure. In addition, Ransomware remains a big threat.

Cybersecurity Stocks: Wide Range Of Products

Further, it behooves an investor to know which cybersecurity stocks address ransomware, phishing or other kinds of cyberattacks.

Meanwhile, 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.

Other cybersecurity firms with a sizable government business include Tenable, Rapid7 and CyberArk (CYBR). Tenable in 2021 acquired France-based Alsid, which focuses on identity access management.

In addition, Rapid7 (RPD) and Qualys specialize in vulnerability management services.

Amid the rapid global spread of 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.

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 to companies like Cloudflare 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

Further, 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. Among them, Proofpoint specializes in email and data-loss protection.

Meanwhile, hackers often aim to compromise networks by targeting employees or management who have administrative access. CyberArk manages privileged accounts. In addition, Okta (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.

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.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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