Did you ever notice that people generally don’t think about cybersecurity stocks to buy except when a big company has been hacked or a key government installation has been compromised?
Said to be a $100 billion industry on an annual basis, it takes something along the lines of what Facebook, Inc. (NASDAQ:FB) is currently going through for most investors to consider the consequences of a connected world where information and data flow relatively easily without too much oversight.
My brother is a computer geek and he regularly warns me about the cybersecurity threats out there. I’ve personally avoided several online products and services simply because it was questionable whether my privacy would be protected.
I’m not paranoid or anything, but it does make you wonder when a company as large as Facebook isn’t able to protect its users’ information from unscrupulous third parties.
The following seven cybersecurity stocks to buy provide investors with an opportunity to profit from the very real threats happening in the cloud-based world we live in.
Cybersecurity Stocks to Buy: Cyberark Security (CYBR)
Last July, I called Cyberark Software Ltd (NASDAQ:CYBR) one of “The 10 Best Investments for the Next Decade.” My reasoning was simple: Cybersecurity is a huge deal for Fortune 100 companies that store a lot of information and data in the cloud.
“Estimates put the annual cost of cyber attacks to the U.S. economy at $100 billion, or 0.64% of America’s GDP,” I wrote. “That might not seem like a lot … until you consider that it costs the country 500,000 jobs annually. That’s a lot of people removed from the economy simply because of insufficient cybersecurity. And it’s only going to get worse.”
Since then, CYBR stock is up 17%, but that’s not what I’m excited about.
No, what gets me juiced about Cyberark’s future is what Bank of America analyst Daniel Bartus recently said about the company’s Privileged Account Management (PAM) product, which helps keep out undesirables from a company’s most important information and data.
By 2020, Bartus suggests 75% of large enterprises will be using some kind of PAM product, up from 45% today. He expects Cyberark to be a big part of that growth — and so do I.
Cybersecurity Stocks to Buy: Check Point Software (CHKP)
Also based in Israel, Check Point Software Technologies Ltd. (NASDAQ:CHKP) is one of the big players in firewalls, a critical component to any business’s cybersecurity protection.
It’s not a big grower by any means, but if you’re looking for stability in your cybersecurity stocks, Check Point provides that in spades.
In fiscal 2017, Check Point’s revenue and non-GAAP earnings per share grew by 7% and 13%, respectively to $1.9 billion and $5.33 a share. Its operating cash flow in the past year was $1.1 billion, an 18% increase over a year earlier. It has no debt and $3.8 billion in cash and marketable securities on its balance sheet.
As anyone who follows the tech industry knows, the business is moving to a subscription-based model as opposed to a product-driven one; in fiscal 2017, CHKP grew its subscription revenue by 23% to $480 million or 44% of its overall revenue. Five years ago, it was just 15% of revenue.
So, despite only growing overall revenue by 7% year-over-year, it’s routinely able to deliver double-digit earnings growth as it grows subscription revenues. It’s a winning model.
Cybersecurity Stocks to Buy: FireEye (FEYE)
I have quite the history with FireEye Inc (NASDAQ:FEYE) stock.
First, I said in January 2017, that FEYE stock would never make it back to $20 — at the time it was trading around $13, falling from over $80 just three years earlier — but softened my stance thanks to an email from an employee who got me to look at the bigger picture.
A few months later in June 2017, I presented a more optimistic picture of the cybersecurity stock.
“It certainly is headed in the right direction. The question is whether it’s growing fast enough to merit a $20 valuation,” I wrote. “I’m not convinced FEYE is there yet, but unless the company has a real stinker of a quarter in fiscal 2017 or the tech correction turns into a meltdown, I see a better-than-50/50 chance of hitting $20 within the next 12 months.”
A couple of months after that I suggested that hitting $20 wasn’t going to happen in 2017, which it didn’t, hitting a high of $18 in October. I really felt like the company needed to demonstrate that it could continue to grow its subscription revenues, overall gross margins and show that it was cutting its operating expenses.
In fiscal 2017, it grew subscription revenues by 12%, gross profit margins by 230 basis points to 64.2% and lowered its operating expenses by 16% or $146 million.
Not surprisingly, it went from negative operating cash flow to positive in 2017.
Next stop, $30?
Cybersecurity Stocks to Buy: Splunk (SPLK)
One look at the solutions Splunk Inc (NASDAQ:SPLK) provides and it’s easy to see why its stock’s gained 518%, since it went public at $17 in April 2012. Back then it had 4,800 customers using its data analytics and security platform; today, that’s well over 14,000, including 85% of the Fortune 100.
At the end of 2017, Apple Inc. (NASDAQ:AAPL) announced it was acquiring Shazam, a music app that allows users to enjoy a deeper content experience, for $400 million. That’s peanuts for Apple, but for Shazam, the tie-up allows it to use more of Splunk’s products to be the best music app it can be.
By multiplying that usefulness over 14,000 customers, Splunk was able to grow its revenues and free cash flow by 34% and 55% respectively in 2017. While it’s still losing money on a GAAP basis, a couple more years of growth like it had this past year and you can bet that’s going to change in a hurry.
I just love companies that are generating positive cash flow without resorting to debt. Of all the cybersecurity companies on this list, Splunk might have the best potential because of its business analytics capabilities.
Cybersecurity Stocks to Buy: LogMeIn (LOGM)
If you’re not a techie but want to invest in cyber-security stocks, LogMeIn Inc (NASDAQ:LOGM) could be right up your alley.
In January 2017, LogMeIn made a transformational acquisition buying GoTo from Citrix Systems, Inc. (NASDAQ:CTXS) for $2.9 billion in LogMeIn stock, a move that allows LogMeIn to penetrate further the cloud-based connectivity market which provides services for customers to work and collaborate remotely with other users.
It operates a subscription-based business model, GoTo’s conferencing products added $617 million in revenue to LogMeIn’s top line over the final 11 months of 2017; representing two-thirds of the company’s overall revenue. In February, it made a slightly smaller add-on acquisition buying Jive Communications for $342 million.
“We believe the combination of Jive’s award-winning voice, video, contact center and mobile applications with our leading collaboration products will give LogMeIn one of the best and most comprehensive UCC offerings in the market,” said LogMeIn CEO Bill Wagner. “The result is a deal that will accelerate our overall growth, set a new standard in the UCC market, and provide us with a foundation upon which we’ll build the next generation of LogMeIn’s UCC portfolio.”
Jive operates in the United Communications-as-a-Service market (UCaaS), which is said to be seven times larger than the web conferencing software market where it currently operates.
A work in progress, LOGM could be the surprise winner among cyber-security stocks in 3-5 years.
Cybersecurity Stocks to Buy: Alphabet (GOOGL)
Google launched Chronicle in January, a business dedicated to selling cyber-security software to Fortune 500 companies. It believes that its experience with artificial intelligence and machine learning will make it a better detector of cyber threats than traditional cyber-security software.
With the global cybersecurity market worth an estimated $100 billion, Google sees its machine learning software digging through a company’s data faster and more effectively than current leaders such as Symantec Corporation (NASDAQ:SYMC).
Interestingly, Chronicle is led by former Symantec COO Stephen Gillett.
“We think we’ll be able to help organizations see their full security picture in much higher fidelity than they currently can,” Gillett stated in Chronicle’s Jan. 24 blog post. “We hope that by making this mix of technologies available to more companies at affordable prices, we can give ‘the good guys’ an advantage and help us all turn the tide against cybercrime.”
This would be my recommendation if you’re worried about the risk of owning a money-losing cyber-security stock.
Cybersecurity Stocks to Buy: Cyber Security ETF (HACK)
What would be a collection of cybersecurity stocks without an ETF option?
Dubbed “The world’s first cybersecurity ETF,” the Cyber Security ETF (NYSEARCA:HACK) from ETF Managers Group LLC, is a reasonably inexpensive option — it charges an MER of 0.60% — to capture the potential growth of the cyber-security market without having to guess who the ultimate winners will be.
HACK tracks the performance of the Prime Cyber Defense Index. The index is reconstituted and rebalanced four times a year in March, June, September and December. Stocks included in the index must have a market cap of at least $100 million; it uses a modified tiered equal-weighting methodology to construct the 47-stock portfolio.
Stocks with market caps greater than $600 million are given higher weightings than those below this threshold. Individual stocks are allowed to drift above a 5% weighting. However, if some stocks have a 5% weighting to the point, they exceed 50%, each of the stock’s weightings will be cut to get back to 50%.
Of the top ten holdings, two of the stocks mentioned in this article — SPLK and CYBR — are held by HACK.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.