There’s a nice case for cybersecurity stocks at the moment. The need for digital security is greater than ever. Meanwhile, valuation, at least in the context of tech more broadly, doesn’t look that prohibitive.
To be sure, cybersecurity stocks have performed well so far in 2020. Some names have nearly doubled. But the sector’s largest exchange-traded fund has gained less than 14%, and actually lagged the Nasdaq Composite year-to-date and over long timeframes.
That seems somewhat surprising. The novel coronavirus pandemic is accelerating trends that require ever-better, and ever-pricier, cybersecurity efforts. Remote work is one obvious catalyst for the sector. The general move of activity online is another. Zoom Video Communications (NASDAQ:ZM) is just one example of a company that saw security concerns rise along with its user base.
However, Ram Dantu, professor in University of North Texas’ Department of Computer Science and Engineering and director for the Center for Information and Cyber Security, notes that homes, transportation and enterprises such as hotels and large retail centers are also vulnerable.
The combination of secular growth and reasonable valuation is attractive. That’s particularly true in a market that prizes growth, but also has priced that growth rather dearly in many cases. And with such a broad range of options, cybersecurity stocks can appeal to every kind of investor. Here are 10 names to watch closely going forward:
- Palo Alto Networks (NYSE:PANW)
- SecureWorks (NASDAQ:SCWX)
- NortonLifeLock (NASDAQ:NLOK)
- Okta (NASDAQ:OKTA)
- CyberArk Software (NASDAQ:CYBR)
- Cloudflare (NYSE:NET)
- Proofpoint (NASDAQ:PFPT)
- Check Point Software (NASDAQ:CHKP)
- Zscaler (NASDAQ:ZS)
- ETFMG Prime Cyber Security ETF (NYSEARCA:HACK)
Let’s take a closer look at what makes each of these cybersecurity stocks tick.
Cybersecurity Stocks: Palo Alto Networks (PANW)
Palo Alto Networks is one of the biggest cybersecurity stocks, and perhaps the simplest to own. Unlike other rivals — FireEye (NASDAQ:FEYE) being one example — the company has pivoted successfully to software from hardware. Growth has remained impressive: Palo Alto expects revenue to increase 18% in its fiscal 2020 (ending July).
There are concerns relative to valuation and the technical picture. PANW stock trades at 51x FY2020 adjusted earnings-per-share guidance. That’s despite the fact that earnings will decline this year. Rising deferred revenue and investments behind the business are a factor, but that’s still a big multiple for a company with shrinking profits, if only in the near term.
The second, related, concern is that PANW stock once again trades at resistance around $250. And that resistance has been stiff, holding since early last year. If the stock finally can clear these levels, the charts suggest a potential breakout. But investors have been waiting for that breakout for some time.
SecureWorks at this point is a speculative play. Adjusted profits are minimal. Revenue growth has decelerated to just 6% in the most recent quarter, though the SaaS (software-as-a-service) business is showing better results.
Still, there’s intriguing technology here, and the potential for a catalyst. Dell Technologies (NYSE:DELL) owns 86% of the company. Reports that Dell was looking to sell SecureWorks last year — at a price close to double the current valuation — spiked SCWX stock. A similar rally arrived in December.
It’s possible that Dell hasn’t been able to get a deal done. But with Dell reportedly looking to spin off VMware (NYSE:VMW), SecureWorks could again be in play. And if Dell is more motivated to get a deal done, it could take a lower price, which would still suggest solid upside in SCWX shares. Given the tailwinds behind cybersecurity stocks, Dell likely could find a buyer — whether a private firm or another sector play looking to beef up its offering.
NortonLifeLock is the best cybersecurity play for value investors. The former Symantec trades at less than 14x forward earnings. NLOK stock even offers a dividend yield of 2.5%.
Despite the soft valuation, there’s still the potential for growth here. The consumer-facing company should benefit from a recent rebound in sales of personal computers. LifeLock has been successful targeting older internet users, more of whom may be adopting online services as a result of the pandemic.
Indeed, NortonLifeLock posted a strong fourth quarter, which could be a sign of things to come. If it is, NLOK stock has room to continue its recent rally.
Okta, on the other hand, is the play for growth investors. In fact, after an 83% rally year to date, OKTA stock has one of the highest valuations in the entire market. Shares trade at 40x trailing twelve-month revenue. As a result, Luke Lango argued this month that investors should look to buy the stock only on the dip.
That seems a reasonable argument. But there’s cause for optimism as well. The company’s cloud-based identity management offering is of obvious value in an era of rising remote work. Revenue increased 46% year-over-year in the first quarter.
And this has been precisely the kind of name that has rallied in this market, even beyond cybersecurity stocks. Forced to choose between valuation and growth, the market for some time now has chosen growth. If that continues, OKTA stock will keep gaining.
CyberArk Software (CYBR)
For CyberArk, too, valuation is a bit of a concern, particularly after a recent rally. CYBR stock has moved modestly above the average Wall Street price target. Shares trade at a similar valuation to PANW, at nearly 50x forward earnings, albeit with slower growth of late.
Still, there’s a case here. CyberArk has a broad portfolio, which should gain customers during this unprecedented time. The company stepped onto Okta’s turf with its May acquisition of Idaptive for $70 million.
It’s fair to ask if there are better options among cybersecurity stocks, either in terms of growth or valuation. But CYBR stock is worth a look as well.
For growth investors, there aren’t too many better stories out there than Cloudflare. The provider of so-called “edge computing” solutions is not just a security play, but should also benefit from data growth more broadly. The rise of streaming services like Netflix (NASDAQ:NFLX), more online gaming and even in-game sports betting all can drive demand.
To some extent, the opportunity has been priced in by the 124% YTD rally in NET stock. But, at least on a relative basis, there seems to be more room to run. Fastly (NYSE:FSLY) has quadrupled just since May. Smaller Limelight Networks (NASDAQ:LLNW), whose edge revenues remain minimal, has tripled in the last year.
Admittedly, it’s possible those rallies have gone too far. But it’s also possible that Cloudflare stock still has some catching up to do.
Proofpoint stock has been mostly left out of the rally in cybersecurity stocks. In fact, PFPT actually has declined 3% over the past year.
Decelerating growth has been one factor. But the company still saw revenue increase 24% year-over-year in the first quarter of 2020.
It may simply be that investors have flocked to some of the hotter names in the space. Proofpoint’s offerings, which center on email security, aren’t quite as new or sexy.
But email security seems of particular need in a work-from-home environment. Threats aren’t going anywhere. Like most cybersecurity stocks, PFPT isn’t cheap. But with growth still impressive, a 60x forward multiple isn’t necessarily out of line. It’s possible investors in the sector will rotate back into Proofpoint stock, particularly if the rest of the sector keeps getting more expensive.
Check Point Software (CHKP)
The case for Check Point Software stock is that the company is pivoting into cloud-based solutions from its legacy hardware offerings. Of course, that’s the bear case as well.
After all, those pivots are difficult to execute. Newer, nimbler rivals that build their businesses on the cloud often wind up with a competitive advantage. As noted, FireEye has struggled with a similar transition and Check Point itself has had some struggles along the way.
But there are signs of life. Check Point drove revenue growth in Q1 despite late-quarter disruption from the pandemic. Adjusted earnings per share increased 7%.
Investors are pricing in more success, as CHKP stock has broken out in recent sessions. But the stock still sits below its 2019 peak , and with industry-wide tailwinds there’s a case for new highs, and then some. If Check Point’s pivot continues to work, Check Point stock will continue to rally.
Zscaler is one of those companies that built its business on the cloud, and ZS stock has soared as a result. After the company went public at $16 in early 2018, Zscaler stock now trades at $125.
There’s certainly a great business here. Zscaler’s platform allows users to safely visit external applications and websites. Here, too, remote work is an obvious tailwind, and Zscaler is coming off an impressive fiscal third-quarter report in May that sent its stock soaring.
But here, too, valuation is a concern. In fact, ZS might be the most expensive of all the cybersecurity stocks, at a bit over 40x trailing twelve-month revenue. Next year’s consensus EPS of 28 cents values the stock at over 400x earnings.
Obviously, this is a stock for growth investors only. But as far as growth stories go, ZS is one of the better ones in the space.
ETFMG Cyber Security ETF (HACK)
Investors can also go the ETF route, and HACK is the biggest ETF in the space. It has been a good buy of late, rallying 62% off March lows and touching an all-time high this week.
But investors might be better off picking their favorite cybersecurity stocks, because HACK isn’t necessarily a pure-play on the sector. The biggest holding is Cisco Systems (NASDAQ:CSCO). And while Cisco has security offerings, including recent acquisition Duo Security, its networking business drives most of its profits. Other top 10 holdings like Splunk (NASDAQ:SPLK) and Akamai Technologies (NASDAQ:AKAM) also derive much, or most, of their value elsewhere.
Still, HACK represents a solid way to play the space, with holdings across the industry, around the world and split between value and growth profiles. And with the stock only marginally above 2018 and 2019 highs, there could be more room to run — particularly if the tailwinds behind the industry continue to whirl.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.