[Editor’s note: This story was previously published in August 2018. It has since been updated and republished.]
Another day. Another hack. Another reason to buy a cybersecurity stock. That has been my 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 (NYSE:WEN) to Whole Foods to Uber to Yahoo and U.S. universities has 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 Cybersecurity ETF (NYSEARCA:HACK) is up roughly 20% over the past year, almost double the S&P 500’s return of 18%.
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 15 cybersecurity stocks that investors should watch over the next several years. Indeed, I think a few of them could be huge winners:
Palo Alto Networks (PANW)
When it comes to cybersecurity stocks, the cream of the corp 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 a 350% rally in PANW stock over the past five years.
Recent numbers are strong, the uptrend remains intact, and analysts remain confident on the stock, so it is all around thumbs up for PANW here and now.
While Palo Alto Networks may be the cream of the corp in this industry, Fortinet Inc (NASDAQ:FTNT) isn’t too far behind.
This is another really big, really strong cybersecurity company that has a strong track record of 20%-plus revenue growth and strong share price gains. Over the past five years, FTNT is up 300%.
Revenue growth isn’t slowing at all (up 21% last quarter), implying that despite increased competition, Fortinet continues to ride secular tailwinds in cybersecurity to 20%-plus revenue growth. Thus, so long as cybersecurity tailwinds remain strong, FTNT stock should do well.
Analysts are worried about valuation here and now, with the stock trading at nearly 50X forward earnings. That does seem a little rich and this stock may be due for a correction in the near future. But thereafter, long-term tailwinds should drive FTNT stock higher.
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 stock is up just 7% over the past year. A lot of the recent weakness in CHKP stock has to do with anemic revenue growth. Revenue growth was just 2% last quarter, an usually 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 20X 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 (they see less than 1% upside over the next 12 months), 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.
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 (just 6% last quarter). Adjusted gross margins are inching higher, but not by much. The company is barely profitable, yet the valuation is fairly sizable at more than 3X trailing sales.
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 3. Right now, we are just above 3. Thus, further weakness in the stock should be expected, but could turn into a medium-term buying opportunity.
Proofpoint (NASDAQ:PFPT) is the nascent, hyper-growth player in the cybersecurity space.
The company isn’t all that big (under $6 billion market cap, versus nearly $20 billion for Palo Alto Networks). But, what this company lacks in size, it makes up for in growth. Revenue growth last quarter was 40%, and it was 40% the quarter before that, too.
Because of this massive growth in a rapidly expanding industry, PFPT stock has done quite well. The stock is up nearly 300% over the past five years.
Analysts think this stock heads higher. So do I. Growth rates are huge, the valuation is reasonable, and the chart looks good (big buy signal if the stock drops to $110, its 200-day moving average).
There is a lot of noise surrounding Imperva (NASDAQ:IMPV) right now. But, I think that if you zoom out and look at the big picture, this is a cybersecurity company heading in the right direction.
IMPV stock got slammed recently because of mixed quarterly numbers that included a big-cut to the full-year guide. The rationale behind the down-guide was that Imperva is transitioning to a subscription model, and that is adversely affecting revenue and profits in the near-term.
Longer-term, though, this is the right move. We are entering the subscription economy era. Moreover, Imperva operates in a rapid growth area of cybersecurity (hybrid cloud), and that gives them exposure to huge tailwinds over the next several quarters.
Meanwhile, the valuation on IMPV stock is reasonable at only 4.5X sales. Thus, in a big picture, I think IMPV stock is headed in the right direction. But, IMPV won’t be a big winner overnight, so expect some choppiness while Imperva’s financials take a near-term hit from the subscription shift.
Much like Proofpoint, CyberArk (NASDAQ:CYBR) is a cybersecurity company characterized by small scale but big growth.
CyberArk is even smaller than Proofpoint (just a $2 billion market cap). But, growth is really big. Last quarter, revenues rose 35% year-over-year, and deferred revenue rose by more than 50%.
Also much like PFPT, CYBR stock has been a big winner due to its big growth. Over the past year, CYBR stock is up 80%.
Analysts think this run will continue, albeit at a much slower rate. That seems reasonable to me. This stock is slightly more expensive than PFPT, but growing at a slower rate, so if you are searching for growth in the cybersecurity space, I’d pick PFPT over CYBR.
One of the bigger companies on this list, Cisco (NASDAQ:CSCO), is much more than just a cybersecurity company. But, a big part of this company’s turnaround narrative is centered on cybersecurity.
That part of the Cisco narrative is doing well, and is powering improved financial results. But, Cisco as a whole remains a low-growth business with struggling margins. Moreover, laps are going to get tougher going forward, so slowing revenue growth is a risk this company is looking at it in the near- to medium-term future.
That being said, CSCO stock is pretty cheap at just 16X forward earnings, and the chart looks pretty good.
Big picture, CSCO stock has good, but not great, upside from here. It is a low-risk, low-volatility investment with a cheap valuation. But, it also lacks big-time growth drivers to unlock huge share price appreciation in the long-term.
Although it is one of the smaller names on this list, Carbonite (NASDAQ:CARB) has one of the better growth narratives in all of cybersecurity.
This is a company that is positioning itself as a data protection company. Considering the volume of digital data is exploding higher right now on a global scale, data protection is the right niche to dominate over the next several years.
Carbonite’s numbers are really good. Revenues rose more than 30% last quarter. Gross margins are trending higher. Operating margins, too. Net profits are growing by a whole bunch from a small base.
The valuation, meanwhile, isn’t all that bad at 4X trailing sales. Plus, the stock is up more than 100% over the past year, and it has a bunch of positive momentum right now. Altogether, CARB stock looks like a winner.
The next cybersecurity stock to watch over the next several years is Qualys (NASDAQ:QLYS).
The value prop of Qualys is getting enterprise customers to sign onto their platform, consolidate their security and compliance stacks, and cut IT spend. That is a pretty promising value prop, and a lot of customers are buying into it.
Last quarter, revenues at Qualys rose more than 20%. Same with last quarter, and the quarter before that. Gross margins aren’t soaring higher, but operating margins are moving higher as big revenue growth is driving opex leverage.
From a valuation perspective, this hyper-growth cybersecurity stock looks fully valued at over 13X trailing sales. That is about as big as it gets in this industry, but Qualys isn’t the biggest grower. Thus, going forward, valuation will likely weigh on share price performance.
Of all the stocks on this list, Symantec (NASDAQ:SYMC) is the one that has been under the most pain.
SYMC stock is down more than 30% over the past year, mostly thanks to slowing revenue growth, which just turned negative. Considering competition in this space is only intensifying, it is discouraging to see revenue growth already dip into negative territory.
That being said, SYMC stock is about as cheap as it gets in this sector. The stock trades at 2.5X trailing sales and 13X forward earnings. Those are pretty cheap multiples for exposure to cyber defense.
If the growth trajectory for this company improves, SYMC stock could soar higher. Until then, though, SYMC stock will remain weak. There simply isn’t much demand for zero-growth cyber defense stocks.
One cybersecurity stock with a very attractive and multi-faceted growth narrative is Akamai (NASDAQ:AKAM).
The Akamai growth narrative is really quite broad. On one end, the company’s fastest-growing segment is its Cloud Security solutions. Revenues in this segment are consistently growing around 25% to 35% year-over-year each quarter, and momentum is strong due to the security portfolio including new products.
On the other end, Akamai provides solutions that enable the shift from linear content to internet content. This shift is only gaining momentum, and as such, Akamai’s growth narrative and numbers are only getting better.
Valuation is a concern for this stock. But, the fundamentals are pretty good. Thus, while I don’t think AKAM stock has another 20%-plus upside in its tank over the next 12 months, I do see this stock heading higher in a multi-year window.
Another high-growth name in this space is Splunk (NASDAQ:SPLK).
Splunk essentially operates in the world of turning data into actionable insights. This is a good place to be. It puts Splunk at the heart of a $55 billion addressable market. Revenues currently sit around $1.3 billion on a trailing 12 month basis, so there is clearly a long runway for big growth.
But, revenue growth has been consistently slowing at SPLK. The valuation, however, has not compressed. That is a worrisome combination. With revenue growth last quarter under 40%, and the price-to-sales multiple above 10X, this stock looks unnecessarily risky here and now.
Analysts have been moving to the sidelines on this name, and insiders are selling a bunch, so now might be the time to heed the warning signs.
F5 Networks (FFIV)
F5 Networks (NASDAQ:FFIV) has been a winner to-date. But, that could change soon.
There’s no doubt about it. FFIV stock has been a cybersecurity winner. Over the past year, the stock is up 60%. Yet, despite the big run, the forward-earnings-multiple on FFIV stock remains below 20.
Thus, the valuation is attractive. But, it is on top of what is projected as sub-10% earnings growth over the next several years. A 20X multiple for less than 10% growth isn’t all the great, especially considering the market is trading at a lower multiple (17X) for bigger growth (16.5%).
Perhaps that is why most analysts have a price target on the stock that is below the current price tag. I think the analysts are right on this one. This feels like a low growth company with a big growth valuation. Cybersecurity tailwinds are strong, but there are better cybersecurity stocks on this list with more upside potential.
Freshly public and relatively small, Zscaler (NASDAQ:ZS) is one of the most exciting and risky cybersecurity stocks on this list.
Zscaler went public at $16-per-share in March. The IPO was a huge success. ZS stock doubled in its first day of trading, closing at $33. The momentum hasn’t really stopped. Today, ZS stock is around $40.
The hype makes sense. Zscaler is a cloud security company with nearly 3,000 customers, a huge international presence, 50%-plus revenue growth and 80%-plus gross margins. The company is disrupting a huge, nearly $20 billion cloud and mobility market, and revenues last year were just $126 million.
Thus, the long-term growth narrative supporting ZS stock is quite promising. But, this is nearly a $5 billion company that is expected to do under $200 million in sales this year, so the stock is trading at a rather huge 25X-plus sales multiple. That isn’t a risk-off investment. As such, ZS is the high-risk, high-reward name in this cybersecurity bunch.
As of this writing, Luke Lango was long HACK, PANW, FTNT and PFPT.