[Editor’s note: This story was previously published in February 2019. 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 (NASDAQ:WEN) to Uber (NYSE:UBER) to Capital One and even United States universities have 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 Cyber Security ETF (NYSEARCA:HACK) is up roughly 50% since early 2017, almost double the S&P 500’s return of 30%.
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 crop 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 an almost 150% rally in PANW stock over the past five years.
PANW stock has sold off over the past few months. This selloff is an opportunity. The fundamentals remain strong (28% revenue growth last quarter). The outlook remains robust (27% revenue growth projected for this year). Analysts remain confident (consensus price target implies 30% upside). The secular drivers behind the cybersecurity industry remain vigorous.
Thus, recent weakness is an opportunity, and nothing more.
While Palo Alto Networks may be the cream of the crop in this industry, Fortinet (NASDAQ:FTNT) isn’t too far behind.
This is another really big, really strong cybersecurity company that has a strong track record of around 20% revenue growth and strong share price gains. Over the past five years, FTNT is up well over 200%.
Revenue growth isn’t slowing at all, implying that despite increased competition, Fortinet continues to ride secular tailwinds in cybersecurity to around 20% revenue growth. Thus, so long as cybersecurity tailwinds remain strong, FTNT stock should do well.
Valuation was rich for a brief moment in time. That moment in time has now passed. With FTNT stock 15% off its recent highs, the forward price-to-earnings multiple has come down to 33, versus an all time high valuation of over 50 back in mid-2018. With the valuation now at much more reasonable levels, near-term upside looks compelling. As such, now looks like a good time to buy.
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 hasn’t gone anywhere in two years. A lot of this weakness in CHKP stock has to do with anemic revenue growth. Revenue growth was just 4% last quarter, an unusually 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 a little less than 17 times 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, 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 than it is for FTNT or PANW.
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. In 2019, that’s caught up with the stock, which has fallen just over 15% this year. The company is also barely profitable, and that hasn’t helped investor sentiment amid sluggish revenue growth.
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 three. Right now, we are just above 3. Thus, further weakness in the stock should be expected, but could eventually turn into a medium-term buying opportunity.
Proofpoint (NASDAQ:PFPT) is the nascent, hyper-growth player in the cybersecurity space — and one of the more exciting cybersecurity stocks.
The company isn’t all that big (under $7 billion market cap). But, what this company lacks in size, it makes up for in growth, with a 25% year-over-year revenue growth rate reported last quarter, and 20%-plus revenue growth expected in each of the next two years.
Because of this massive growth in a rapidly expanding industry, PFPT stock has done quite well. The stock is up about 200% 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.
Hyper-growth cybersecurity company Okta (NASDAQ:OKTA) has been a Wall Street favorite for the past few quarters, and projects to remain one for the next few years, too.
Okta has developed what the company calls the Identity Cloud. The Identity Cloud is basically just taking cybersecurity and building it for the individual, as opposed to for an ecosystem or service. The analogy I like to use is that if most cybersecurity solutions are a castle surrounding a company’s data, then Okta’s Identity Cloud is armor protecting each individual’s data.
The idea is that if everyone has armor, everyone’s data is safe, and you don’t need a castle — which is ideal, because cybersecurity castles can be restricting and inconvenient. A lot of companies are buying into this idea. Okta has reported 50%-plus revenue growth in each of the past several quarters, alongside 30%-plus customer growth. All this growth is high-quality growth, too, since gross margins at the company run north of 70%.
All in all, Okta has all the right ingredients for huge profit growth over the next few years. Sure, a lot of that profit growth is priced in today, and the stock is extremely expensive. But, in the low rate environment in which we find ourselves today, valuation takes a backseat to growth. So, for the foreseeable future, OKTA stock should run higher.
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 $4.4 billion market cap). But, growth is really big. Last quarter, revenues rose 29% year-over-year, and deferred revenue rose by more than 30%. Revenue growth is expected to be in the 20% range for the next several years, too.
Also much like PFPT, CYBR stock has been a big winner due to its big growth. Over the past year, CYBR stock is almost 70%.
Analysts think this run will continue, albeit at a 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. Nonetheless, secular cybersecurity tailwinds and big growth potential will push CYBR stock higher, too.
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, it’s reasonable to believe that the cybersecurity-led turnaround will slow going forward, as the laps get tougher and as the revenue growth trajectory flattens out again.
That being said, CSCO stock is pretty cheap at just 13.3 times forward earnings, and the chart looks pretty good (outside of the recent trade war inspired collapse).
Big picture, CSCO stock is low risk, low reward. 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 haven’t been great as of late. The company has reported continued robust revenue growth. But, those same big growth numbers have fallen shy of the big growth estimates put forth by Wall Street. As such, CARB stock has struggled this year, and is down 69% over the past 52 weeks.
The valuation isn’t all that bad at six times forward earnings. But, the stock has a ton of downward momentum right now. I’d wait for this momentum to ease up before buying into this falling knife.
The next cybersecurity stock to watch over the next several years is Qualys (NASDAQ:QLYS).
The value proposition of Qualys is getting enterprise customers to sign onto their platform, consolidate their security and compliance stacks and cut IT spending. That is a pretty promising value prop, and a lot of customers are buying into it.
Last quarter, revenues at Qualys rose more than 15% year-over-year. Gross margins aren’t soaring higher, but operating margins are moving higher as big revenue growth is driving operating expense leverage.
From a valuation perspective, this hyper-growth cybersecurity stock looks fully valued at over 11 times trailing sales. That is about as big as it gets in this industry. But, Qualys isn’t the biggest grower in the space. 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 struggling the most in the long term.
SYMC stock essentially hasn’t gone anywhere in five years, mostly thanks to slowing revenue growth, which turned negative in fiscal 2019. Considering competition in this space is only intensifying, it is discouraging to see revenue growth dip into negative territory.
That being said, SYMC stock is about as cheap as it gets in this sector. The stock trades at 3.4 times trailing sales and just under 13 times forward earnings. Those are pretty cheap multiples for exposure to cyber defense. Revenue growth has also bounced back into positive territory in fiscal 2020, and is expected to remain in positive territory for the next few years.
If the growth trajectory for this company continues to improve, SYMC stock could soar higher. Right now, it looks like that will indeed happen. As such, SYMC stock could run higher over the next few quarters as growth comes back into the picture.
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, and that market has a ton of tailwinds. Revenues currently sit around $2 billion on a trailing 12 month basis, so there is clearly a long runway for big growth. Indeed, in the long run, SPLK stock should run significantly higher.
But, valuation is a concern. Specifically, it appears that investors quickly recognized Splunk as a long-term winner, and all rushed into SPLK stock. That caused the valuation to sprint ahead of the fundamentals. As such, over the past year, SPLK stock hasn’t really gone anywhere — despite continued huge revenue growth — because the fundamentals are trying to catch up with the valuation.
Eventually, they will. When they do, SPLK stock will be ready to take a another meaningful leg higher, and another one after that, too. Long term, this stock is going higher.
F5 Networks (FFIV)
F5 Networks (NASDAQ:FFIV) has fallen upon hard times. But, that could change soon. Over the past year, the stock is down over 30%, while most of its peers are up over the past 52 weeks.
Why the big drop? A few bad quarters with revenue misses and light guides, the sum of which have implied to investors that the growth story here is slowing.
Having said that, the valuation on FFIV stock is now very attractive. FFIV projects as a sub-10% earnings growth company over the next several years. At one point in time, this was a 20 times forward earnings multiple stock. That’s too big for sub-10% profit growth. Today, though, the forward earnings multiple is down around 12. That’s much more in-line with sub-10% profit growth.
Perhaps that is why the consensus price target on FFIV stock is 20% above the current price tag. I think the analysts are right on this one. Near-term valuation-driven upside in FFIV stock is compelling.
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 2018. 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 in the $70 range.
The hype makes sense. Zscaler is a cloud security company that is growing very, very quickly with very high gross margins and a ton of visibility to produce huge profits at scale. The company is disrupting a huge, nearly $20 billion cloud and mobility market, and revenues over the past 12 months amount to less than $300 million.
Thus, the long-term growth narrative supporting ZS stock is quite promising. But, this is a $9 billion company that is expected to do around $400 million in sales next year, so the stock is trading at a rather huge 22.5X forward one year sales multiple. That isn’t a risk-free 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, OKTA, PFPT and SPLK.