Cybersecurity stocks are a hot commodity right now. If there is one thing that we have all learned in 2015 it’s that cybercrime is evolving so fast that even the most sophisticated threat detection systems are sometimes having trouble keeping up with it all.
We have already seen some major hacks so far this year, including the attack on Office of Personnel Management where personal data by millions of federal workers was compromised. Though not yet confirmed, the recent technical malfunctions by the NYSE, United Airlines and WSJ could also be pinned down on some sort of cybercrime.
Organizations are on high alert more than ever before, with a recent Cisco (CSCO) analysis suggesting that the average large enterprise currently has no less than 54 cybersecurity vendors to help with data loss management, identity access, app security testing and many other related functions.
Cisco remains the market leader in the cybersecurity industry in terms of market share, and is further looking to increase its stake in the $25 billion enterprise security infrastructure from 9% to around 25% mainly through a raft of acquisitions. However, cybersecurity solutions remains a tiny part of its overall business and thus loses out to pure-play cybersecurity stocks.
Many cybersecurity stocks have enjoyed roaring gains in 2015. But some of these stocks still have plenty of gas left in their tanks to power long-term gains.
Palo Alto Networks (PANW)
Market Cap: $16.0 billion
YTD Return: 55%
Palo Alto Networks is reputed to own some of the best cybersecurity solutions in the industry. PANW stock remains the most beloved of cybersecurity stocks, and has been receiving plenty of love from Wall Street analysts such as Citi, Cowen and JPMorgan.
Palo Alto has been slated to continue gaining firewall/UTM (hardware) market share at a faster clip than most of its rivals including Fortinet (FTNT), with JPMorgan recently chiming in a positive note for the company, saying it can more than triple its current 7% market share to 24% by 2024. These projections appear achievable considering that many security resellers continue to prefer the company as a long-term strategic partner.
Palo Alto’s current price-to-sales reading of 20 is one of the highest in the sector and raises genuine overvaluation concerns. This worry is further compounded by the fact that the company, like many other players in the sector, remains unprofitable. However, PANW stock is expected to grow earnings by a robust 50% clip this year and 51% CAGR over the next five years, giving it plenty of gas to both grow into its frothy valuation and make some good share returns as well.
FireEye (FEYE)
Market Cap: $7.5 billion
YTD Return: 51%
Although FEYE stock has lost some mojo ever since UBS downgraded the shares in the wake of its huge runup, FEYE’s 51% YTD return ranks among the best for cybersecurity stocks.
FireEye remains a top pick in the space due to its industry-leading top line growth — 69.5% during the last quarter. But perhaps its chief attraction its Mandiant forensic unit that has been called in after massive hacks in the past, including those on the U.S. by the Chinese Army (2013), as well as hacks of Sony (2014) and Anthem (2015) among others.
FEYE shares sport a stratospheric valuation with a current PS reading of 15. The company, however, managed to cut its losses in half during the last quarter and is looking to become profitable by 2017. Further its 5-Year projected earnings growth rate of 35% annually gives it ample room to grow into its steep valuation.
Earlier in the year FireEye was the target of merger speculations by Cisco. FireEye, however, said that it would not be interested in a merger until it achieves revenue of at least $1 billion, which points to somewhere in 2017. Coincidentally this is the time around which the company has projected it will move from the red to the black. That change should give FEYE stock a premium valuation over its loss-making cybersecurity stocks.
PureFunds ISE Cyber Security ETF (HACK)
Assets Under Management: $1.3 billion
YTD Return: 19%
Obviously we’ve shifted from stocks to exchange-traded funds. But HACK qualifies to be on your investment radar due to its potential for good returns.
With an YTD of 19%, HACK’s performance is rivaled only by healthcare ETFs. HACK’s assets under management, or AUM, have almost quadrupled over the past five months alone. This ETF is a good pick if you feel that finding reasonably-priced stocks with good growth profiles and minimal underlying volatility and downside risk has become a Herculean task.
Expenses for HACK run 0.75%, or $75 annually for every $10,000 invested. But the continued interest in cybersecurity stocks by investors offers good potential for long-term gains with the HACK ETF.
As of this writing, Brian Wu did not own any of the aforementioned securities.
