You may think the time is right to move into cybersecurity stocks, if you’re reading this IBD investing primer.
Cybersecurity stocks have rallied amid reports that Russian hackers accessed U.S. government computer networks via network management software provided by SolarWinds (SWI).
The U.S. Cybersecurity and Infrastructure Security Agency warned that the cyberattack marks “a grave risk to the Federal Government and state, local, tribal, and territorial governments as well as critical infrastructure entities and other private sector organizations.”
Amid the rally in cybersecurity stocks, some companies are now extended and not in a buy range. They include Palo Alto Networks (PANW), Zscaler (ZS), CyberArk Software (CYBR) and CrowdStrike Holdings (CRWD).
Cybersecurity Stocks: SolarWinds Breach Follows Coronavirus Pandemic
Shares in FireEye (FEYE), which has a big government customer base, recently plunged after it disclosed a cybersecurity breach.
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. CrowdStrike, Zscaler and Okta (OKTA) on Dec. 2 reported October quarter earnings that topped expectations as the Covid-19 outbreak upped demand for their computer security products.
CrowdStrike stock and Zscaler stock belong to the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics. Meanwhile, CrowdStrike stock was featured as an IBD Stock of the Day.
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.
Computer Security Market Growth
It’s spelled SASE — pronounced “sassy” — and it stands for Secure Access Service Edge.
Meanwhile, the Computer-Software Security group ranks No. 97 out of 197 industry groups tracked by IBD.
Palo Alto stock ranks No. 26 in the IBD 50 roster of fast-growing companies. Fortinet stock ranks No. 48.
Palo Alto Networks reported earnings that topped estimates on Nov. 16. Palo Alto has been on an acquisition spree, most recently with the purchase of Expanse. It aims to build a cloud-based security platform.
Palo Alto stock holds a Relative Strength Rating of 85 out of a possible 99.
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.
Cybersecurity Stocks: Relative Strength Ratings
Also, one key IBD technical measure for cybersecurity stocks are Relative Strength Ratings.
According to IBD Stock Checkup, SailPoint Technology (SAIL) holds a RS Rating of 94 out of a possible 99. SailPoint, an identity management software maker, reported adjusted earnings of 15 cents, swinging to a profit from a 1-cent loss a year earlier. Also, revenue jumped 47% to $92.5 million.
In addition, Zscaler is the biggest provider of cloud-based web security gateways that inspect customers’ data traffic for malware.
Also, 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.
At its recent Fal.Con 2020 virtual user conference, CrowdStrike announced plans to expand from endpoint security into protecting cloud workloads.
Coronavirus Shakes Up Cybersecurity
Meanwhile, analysts say Netskope and Menlo Security are among cloud security startups that could launch initial public offerings. Further, analysts say a new wave of startups seems to be taking share from industry incumbents.
They include Illumio, SentinelOne, Cybereason, Exabeam and iBoss. Also, SentinelOne recently raised $267 million in a funding round that gave it a $3.1 billion valuation. Menlo Park raised $100 million, valuing the company at $800 million.
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, some companies have cut back on technology spending amid a weakening economy.
Further, industries hard hit by the coronavirus pandemic will spend less on security software in 2020. They include airlines, hotels, retail and restaurants.
Cybersecurity Stocks: More M&A On The Way?
Cloud security will boom 33% to $585 million in 2020, Gartner said. 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 his recent report. “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.”
In addition, while cybersecurity stocks often get a boost from well-publicized cyberattacks, the impact can be short-lived.
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.
Cloud Computing One Key Trend For Cybersecurity Stocks
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 (MSFT) is integrating more security tools into its cloud-based Office 365 software. Microsoft competes with cybersecurity firms such as Proofpoint (PFPT), Splunk (SPLK), CrowdStrike, Okta, and startup Netskope.
“As workloads and compute instances grow, the security paradigm shifts from a traditional data center architecture to cloud-delivered services,” said a recent Bank of America note. “We believe the shift to cloud and software-as-a-service security continues and potentially accelerates in 2020.”
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.
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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