Another day, another hack, another reason to buy a cybersecurity stock.
That seems to be the motto that is sweeping across the stock market recently. Recent headline hacks and data leaks, ranging from Equifax Inc. (NYSE:EFX) to Facebook Inc (NASDAQ:FB), have made the need for cybersecurity solutions in today’s increasingly digitally connected and reliant world more apparent than ever.
That is why the First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR) is up nearly 20% over the past six months. By comparison, the NASDAQ-100 is up just 6% over the past six months, while the S&P 500 and Dow Jones Industrials are each up just 1% in that same time frame.
Clearly, cybersecurity stocks have been the big winners recently.
This should remain true over the next several years. While the group as a whole might be entering overbought territory in the near-term (a 20% run higher in an exchange-traded fund implies that there have been some really big individual movers recently), any forthcoming weakness in the cybersecurity space should be viewed as a long-term buying opportunity.
With that in mind, here’s a list of three cybersecurity stocks which could be among the biggest winners in this secular growth group.
Cybersecurity Stocks to Buy: Palo Alto Networks Inc (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 Inc (NYSE:PANW)”.
In other words, Palo Alto Networks is so big and so good at what they do that the company may as well be a substitute for the entire cybersecurity space. The company not only dominates the cybersecurity space, but that dominance comes with a consistent track record of 20%-plus revenue growth and healthy operating margin expansion.
This growth will continue. PANW’s customer base continues to grow at an absurd rate, while revenue growth continues to run at a 20%-plus rate. Sustained sizable growth in both user base and revenues illustrates that PANW is fully reaping the secular tailwinds pushing forth cybersecurity solution adoption globally.
This strong growth will lead to PANW stock heading materially higher.
Over the past 5 years, revenues have grown at a compounded annual growth rate of nearly 50%, while operating margins have zoomed from 7.2% to 20.1%. Growth will inevitably slow over the next 5 years, but that 50% growth could very easily stabilize at 20% growth per year over the next 5 years. Meanwhile, margins will keep roaring higher so long as revenue growth remains robust. Thus, margins could also very easily hit 30% in 5 years.
The combination of 50% revenue growth and another 10 points of operating margin expansion will lead to huge earnings growth over the next several years. That continued strong earnings growth will power PANW stock significantly higher from current levels.
Cybersecurity Stocks to Buy: Proofpoint Inc (PFPT)
What cybersecurity infant Proofpoint Inc (NASDAQ:PFPT) lacks in size, it makes up for in growth.
Proofpoint isn’t like the Palo Alto Networks of today. It isn’t big, nor does it operate at 20% operating margins, nor is it the poster-child for the entire cybersecurity space.
But Proofpoint is like the Palo Alto Networks of yesterday. The smaller version that was growing at 50% per year and expanding margins from 7% to 20%.
Last quarter, Proofpoint reported revenue growth of 40%. That is a big number. It is also bigger than the revenue growth the company reported the quarter before that (36%).
This year, Proofpoint expects revenues to grow by 37%. That is the same growth rate as last year. It is also the same growth rate the company has maintained for the past five years.
In other words, this massive 30-40% revenue growth story isn’t slowing down at all. That is a sure-fire sign that demand for PFPT’s products is ramping alongside growing demand in the entire cybersecurity market. Further, that implies that PFPT is a secular winner in a secular growth market.
Meanwhile, operating margins are also ramping higher, and are expected to reach 14% by 2020.
In totality, PFPT has PANW written all over it. PANW stock has gone from $40 to $200 over the past 5 years. A similar rally could be in store for PFPT stock over the next 5 years.
Cybersecurity Stocks to Buy: Fortinet Inc (FTNT)
Fortinet Inc (NASDAQ:FTNT) is another really big, really strong cybersecurity company that is a lot like Palo Alto Networks. Fortinet just has less juice in its growth story. The company isn’t as big, the growth rates aren’t as large, and the margin expansion narrative isn’t as strong. But FTNT stock is also less expensive, and that makes the stock an interesting option for more risk-adverse investors.
Revenue growth over the past five years at Fortinet has run in the 20%-plus range. That isn’t Palo Alto Networks levels. But it is still pretty good.
That growth rate isn’t slowing all that much. FTNT just reported quarterly earnings, and that report included 17% revenue growth. Therefore, it looks like double-digit revenue growth is here to stay for the next several years.
Word of caution: FTNT’s quarterly numbers were very good, and they were much better than expected. But FTNT stock failed to stage a meaningful rally as a result, and that is usually a sign that a near-term top is in.
Long term, though, FTNT stock is still a winner. Revenue growth remains robust, driven by secular tailwinds, while margins continue to head higher.
As of this writing, Luke Lango was long FB, CIBR, PANW and PFPT.