Another day, another hack, another reason to buy a cybersecurity stock. That has been our motto for the better part of the past few years, as a huge surge in digital data volume globally has been accompanied by an equally large surge in headline cyber attacks. The big one was the Equifax (NYSE:EFX) scandal back in mid-2017, but that incident is far from isolated. Everyone from Under Armour (NYSE:UAA) to Wendy’s (NASDAQ:WEN) to Uber (NYSE:UBER) to Capital One and even United States universities have dealt with a cyber attack of some sort over the past several years.
Concurrent to the rampant rise in cyber attacks, demand for cybersecurity solutions has burgeoned, and cybersecurity stocks have bounced. The Prime Cyber Security ETF (NYSEARCA:HACK) is up roughly 50% since early 2017, almost double the S&P 500’s return of 30%.
The pace of these attacks will only increase as more valuable data shifts online over the next several years. As such, demand for cybersecurity solutions will continue to grow and cybersecurity stocks will continue to outperform.
With that in mind, here’s a list of 6 cybersecurity stocks that investors should watch over the next several years. Indeed, we think few of them could be a huge winner.
Palo Alto Networks (PANW)
When it comes to cybersecurity stocks, the cream of the crop is Palo Alto Networks (NYSE:PANW).
“Another day, another hack, another reason to buy a cybersecurity stock” could just as easily read “another day, another hack, another reason to buy Palo Alto Networks stock.” In other words, Palo Alto Networks is so big and so good at what it does that the company may as well be a substitute for the entire cybersecurity space.
This dominance has manifested itself in a long and steady track record of 20%-plus revenue growth and healthy operating margin expansion, the sum of which has powered an almost 150% rally in PANW stock over the past five years.
PANW stock has sold off over the past few months. This selloff is an opportunity. The fundamentals remain strong (28% revenue growth last quarter). The outlook remains robust (27% revenue growth projected for this year). Analysts remain confident (consensus price target implies 30% upside). The secular drivers behind the cybersecurity industry remain vigorous.
Thus, recent weakness is an opportunity, and nothing more.
While Palo Alto Networks may be the cream of the crop in this industry, Fortinet (NASDAQ:FTNT) isn’t too far behind.
This is another really big, really strong cybersecurity company that has a strong track record of around 20% revenue growth and strong share price gains. Over the past five years, FTNT is up well over 200%.
Revenue growth isn’t slowing at all, implying that despite increased competition, Fortinet continues to ride secular tailwinds in cybersecurity to around 20% revenue growth. Thus, so long as cybersecurity tailwinds remain strong, FTNT stock should do well.
Valuation was rich for a brief moment in time. That moment in time has now passed. With FTNT stock 15% off its recent highs, the forward price-to-earnings multiple has come down to 33, versus an all time high valuation of over 50 back in mid-2018. With the valuation now at much more reasonable levels, near-term upside looks compelling. As such, now looks like a good time to buy.
Check Point (CHKP)
Another cybersecurity industry titan is Check Point (NASDAQ:CHKP). And, as an industry titan, CHKP stock is a likely winner if cybersecurity tailwinds stay strong.
But, CHKP stock has struggled lately. CHKP hasn’t gone anywhere in two years. A lot of this weakness in CHKP stock has to do with anemic revenue growth. Revenue growth was just 4% last quarter, an unusually low mark for a cybersecurity giant.
Long story short, it looks like competition is weighing on CHKP stock. Thus, go-forward growth prospects — while strong — are muddied by competitive threats. Granted, CHKP stock sports a reasonable valuation at just a little less than 17 times forward earnings. But, that low valuation runs next to low growth, so the stock really isn’t a bargain.
Analysts aren’t in love with this stock, and the chart isn’t all that great, either. Thus, while CHKP should head higher in the long run thanks to industry tailwinds, the outlook for the stock in the near- to medium-term is much less promising than it is for FTNT or PANW.
I’d lump cybersecurity company FireEye (NASDAQ:FEYE) more into the Check Point pile than the Palo Alto Networks and Fortinet pile.
This is a solid company with healthy industry drivers, but revenue growth isn’t robust. In 2019, that’s caught up with the stock, which has fallen just over 15% this year. The company is also barely profitable, and that hasn’t helped investor sentiment amid sluggish revenue growth.
As such, FEYE stock doesn’t look like a huge winner in the big picture.
That being said, there is an argument to buy FEYE stock in the near to medium term. Ever since the start of 2016, FEYE stock has been highly cyclical. In that cycle, the stock usually bottoms when the trailing sales multiple hits three. Right now, we are just above 3. Thus, further weakness in the stock should be expected, but could eventually turn into a medium-term buying opportunity.
Proofpoint (NASDAQ:PFPT) is the nascent, hyper-growth player in the cybersecurity space — and one of the more exciting cybersecurity stocks.
The company isn’t all that big (under $7 billion market cap). But, what this company lacks in size, it makes up for in growth, with a 25% year-over-year revenue growth rate reported last quarter, and 20%-plus revenue growth expected in each of the next two years.
Because of this massive growth in a rapidly expanding industry, PFPT stock has done quite well. The stock is up about 200% over the past five years.
Analysts think this stock heads higher. So do we. Growth rates are huge, the valuation is reasonable and the chart looks good.
Hyper-growth cybersecurity company Okta (NASDAQ:OKTA) has been a Wall Street favorite for the past few quarters, and projects to remain one for the next few years, too.
Okta has developed what the company calls the Identity Cloud. The Identity Cloud is basically just taking cybersecurity and building it for the individual, as opposed to for an ecosystem or service. The analogy I like to use is that if most cybersecurity solutions are a castle surrounding a company’s data, then Okta’s Identity Cloud is armor protecting each individual’s data.
The idea is that if everyone has armor, everyone’s data is safe, and you don’t need a castle — which is ideal, because cybersecurity castles can be restricting and inconvenient. A lot of companies are buying into this idea. Okta has reported 50%-plus revenue growth in each of the past several quarters, alongside 30%-plus customer growth. All this growth is high-quality growth, too, since gross margins at the company run north of 70%.
All in all, Okta has all the right ingredients for huge profit growth over the next few years. Sure, a lot of that profit growth is priced in today, and the stock is extremely expensive. But, in the low rate environment in which we find ourselves today, valuation takes a backseat to growth. So, for the foreseeable future, OKTA stock should run higher.
Credit: BusinessInsider, InvestorPlace.com, The Wall Street Journal
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