Cybersecurity gained prominence as digitalization became a buzz word during the pandemic. A recent FBI report cites cyber-scam figures that reached 791,790 incidents in the past year, with losses exceeding $4.2 billion. The surge in attacks has spurred businesses and governments to increase their spending on protection, creating a significant tailwind for some cybersecurity stocks.
The demand for next-generation security software keeps on getting stronger. According to research firm Gartner, global spending on cybersecurity could exceed $150 billion in 2021. In order to capitalize on this hot market, cybersecurity companies are either investing heavily in organic growth or merging with other firms into larger and organizations.
As a result, prices of many cybersecurity stocks have gone up significantly. The share price of Global X Cybersecurity ETF (NASDAQ:BUG) is up 49.3% in the past 12 months as net assets in the 41-stock exchange-traded fund topped $662 billion.
Therefore, today I’ll discuss seven cybersecurity stocks to buy for lucrative returns in this high-growth industry. These companies aim to offer innovative security solutions that help organizations and governments ward off cyber attacks While most of them currently trade at sky-high valuations, a pullback could instantly turn these cybersecurity stocks into valuable investment opportunities for long-term investors.
A streak of high-profile attacks on the Colonial Pipeline, network management company SolarWinds Corp (NYSE:SWI), as well as meat processing heavyweight JBS (OTCMKTS:JBSAY) have pushed cybersecurity issues to the top of the agenda for the Biden administration. For example, several tech stalwarts, including Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOGL), have been invited to a recent White House meeting. Put another way, Wall Street and retail investors are likely to pay continued attention to cybersecurity investing.
With that information, here are some of the top cybersecurity stocks that are primed to gain traction in the coming months and beyond:
- Cloudflare (NYSE:NET)
- iShares Cybersecurity and Tech ETF (NYSEARCA:IHAK)
- McAfee (NASDAQ:MCFE)
- Palo Alto Networks (NYSE:PANW)
- Rapid7 (NASDAQ:RPD)
- SentinelOne (NYSE:S)
- Tenable (NASDAQ:TENB)
Cybersecurity Stocks: Cloudflare (NET)
52-week range: $32.70 – $127.70
Cloudflare is a content distribution network company. It operates a worldwide network of servers that speeds up how websites update and download by routing them through its closest servers. Cloudflare is also developing security and computing services, and is on track to become a one-stop-shop network solution for its customers.
The cybersecurity group released second-quarter results in early August. Revenue totaled $152.4 million, an increase of 53% year-on-year. Non-GAAP net loss came in at $7.3 million, or 2 cents per diluted share, compared to $9.6 million, or 3 cents per diluted share, in the prior-year quarter. Cash and marketable securities ended the quarter at $1.03 billion.
On the results, CEO Matthew Prince remarked, “Whether we’re offering Zero Trust security solutions to the world’s most sophisticated organizations, or enabling the next billion-dollar business with Cloudflare Workers, we remain focused on delivering secure, programmable network solutions that our customers rely on.”
Cloudflare continues to see significant revenue growth that outpaces costs and brings operations closer to profitability. According to management, the addressable market will grow from $32 billion in 2018 to an estimated $100 billion by 2024. Revenue is expected to increase 46% year-on-year to $631 million for 2021.
NET stock hovers slightly above $130, up 84.2% in the last six months. Cloudflare’s price-to-sales ratio surged from 15x in early 2020 to a breathtaking 75x, currently among the highest in the sector. Despite the stock’s potential, long-term investors may want to wait for a pullback to add NET shares to their portfolios.
iShares Cybersecurity and Tech ETF (IHAK)
- 52-Week range: $30.50 – $46.22
- Dividend yield: 0.13%
- Expense ratio: 0.47% per year
Our next choice is an exchange-traded fund (ETF). The iShares Cybersecurity and Tech ETF provides exposure to global stocks along the entire value chain of cybersecurity. The fund began trading in June 2019.
IHAK, which has 41 holdings, tracks the NYSE FactSet Global Cyber Security Index. The 10 leading names account for 45% of net assets of $662 million. Around 80% of the businesses are U.S.-based, followed by Israel (7.73%), Japan (4.01%) and Canada (3.22%).
Cloud security platform provider Zscaler (NASDAQ:ZS), cyber security solutions provider Fortinet (NASDAQ:FTNT), cloud-delivered solutions provider Crowdstrike (NASDAQ:CRWD), e-signature company DocuSign (NASDAQ:DOCU), security product provider Palo Alto Networks and identity management solutions provider Okta (NASDAQ:OKTA) lead the roster.
The ETF surged over 14% year-to-date (YTD), 33% over the past 12 months and saw an all-time high (ATH) in recent days. Trailing price-to-earnings and price-to-book multiples stand at 29.03x and 7.45x, respectively.
As IHAK is most likely to reach new highs in the coming quarters, any potential dip would represent a valuable buying opportunity for buy-and-hold investors.
Cybersecurity Stocks: McAfee (MCFE)
- 52-week range: $12.67 – $28.23
- Dividend Yield: 1.73%
San Jose, California-based McAfee is a device-to-cloud cybersecurity company. It is well known for its digital protection products for individuals and families.
McAfee released second-quarter 2021 results in early August. Revenue came in at $467 million, reflecting a 22% YoY growth. Net income saw a sharper increase, surging to $108 million from $22 million in the prior-year period. Earnings per diluted share stood at 21 cents. Cash and equivalents ended the quarter at $420 million.
After the release of the results, CEO Peter Leav remarked, “Not only did McAfee deliver another solid quarter with revenue, DTC subscribers, profitability and cash flow from operations growing double-digits, but did so while simultaneously closing the transaction to sell the Enterprise Business.”
Impressive quarterly results were fueled by a substantial increase in the number of new customers. Roughly 556,000 new subscribers joined the ranks, up 17% YoY from a year ago, increasing the total to 19.4 million at the end of the quarter.
The company recently forged a new partnership with Visa (NYSE:V) to offer security solutions for Visa Business cardholders. Almost a third of data breaches in the past year involved small businesses. As the increase in threats highlights the need for small businesses to protect their digital assets, McAfee aims to capitalize on this demand.
MCFE stock currently trades in $26.50 territory. It is up 60% so far this year. For 2021, the company is forecasting $1.84 million to $1.85 million in net revenue, beating market expectations of $1.79 billion. The shares at 21.45x forward earnings and 3.71x current sales. A potential decline toward $25 or even below would make the shares attractive.
Palo Alto Networks (PANW)
52-week range: $219.34 – $464.90
Palo Alto Networks is a leading pure-play cybersecurity name. It offers a portfolio of products and services for enterprises as well as government entities. Its security ecosystem includes cloud security platform, Prisma, and artificial intelligence (AI)-powered threat detection platform, Cortex.
The company announced fourth-quarter results in late August. Revenue grew by 28% YoY to $1.2 billion. Adjusted net income increased 12% to $161.9 million, or $1.60 per diluted share, compared with $144.9 million, or $1.48 per diluted share, in the prior-year quarter.
CEO Nikesh Arora cited, “In particular, we saw notable strength in large customer transactions with strategic commitments across our Strata, Prisma and Cortex platforms.”
Over three-quarters of Fortune 100 companies currently use the group’s cybersecurity products. In recent years, Palo Alto Networks invested nearly $3 billion in acquisitions to enhance its offerings. For fiscal 2022, the company estimates revenue to grow at least 24% to reach $5.28 billion.
PANW stock hit a record high in recent days and currently hovers at $460 territory, up 30% YTD. It trades around 63 times forward earnings and 10.60 times sales. As a leading cybersecurity play, PANW shares offer significant upside potential for buy-and-hold investors.
Cybersecurity Stocks: Rapid7 (RPD)
52-week range: $57.73 – $123.39
Rapid7 combines security data and analytics platforms to identify and eliminate critical weaknesses and detect attacks in their digital environments real-time. The company announced second-quarter 2021 results in early August.
Revenue went up by 28% YoY to $126.4 million. In addition, the company grew annualized recurring revenue (ARR) by 29% to $489 million. Adjusted net income came in at $3.9 million, or 7 cents per diluted share, compared with $2.8 million, or 5 cents per diluted share, in the prior-year quarter. Cash and equivalents ended the quarter at $493 million.
“With the recent addition of IntSights leading threat intelligence capabilities, Rapid7 is even better positioned to lead the charge in enabling customers to drive security transformation alongside their digital investments,” CEO Corey Thomas told investors.
In July, Rapid7 finalized a deal to acquire IntSights Cyber Intelligence, a leading cybersecurity threat intelligence provider. The acquisition aims to further enhance the capabilities of its Insight platform, allowing the company to search for threats both inside and outside of a customer’s network.
The company expects to deliver 2021 full-year revenue of $524 million, a growth of 27% YoY. However, investors need to pay a significant premium to get hold of Rapid7’s upside potential. RPD shares hit a record high recently, and hover above $120, up 35% YTD. RPD stock trades at 14x current sales. A potential decline toward $115 or even below would improve the margin of safety.
SentinelOne (S)
52-week range: $39.94 – $66.66
SentinelOne is one of the more recent pure-play cybersecurity companies to go public. Its initial public offering (IPO) in June raised $1.2 billion in cash and valued the company at $10 billion, making it one of the largest IPOs ever for a cybersecurity name.
The company operates an autonomous cybersecurity platform that uses AI to identify and eliminate potential cyber threats automatically. It claims that its cybersecurity software can neutralize threats before they can be carried out by proactively scanning for suspicious activity.
First-quarter 2022 recurring revenue surged 114% YoY to $161 million. However, as the company spends heavily to increase its market share, investors could be waiting a while for the company to turn profits.
Research company Gartner has rated SentinelOne as a leader in endpoint protection. SentinelOne boasts more than 4,700 customers, including a number of Fortune 10 names and hundreds of the Global 2000 firms. The company is expected to generate $176 million in revenue for its full fiscal year 2022.
However, the stock currently has an overstretched valuation. Shares of S stock trade in $64 territory. They have surged almost 30% over the past month and trade at a whopping 115 times current sales. For example, in 2019, Crowdstrike went public at a P/S ratio of 35 when the company was growing recurring revenue and customer spending at faster rates than SentinelOne. Long-term investors should ideally wait for a pullback to buy SentinelOne shares.
Cybersecurity Stocks: Tenable (TENB)
52-week range: $33.25 – $58.45
Our last stock, Tenable, provides solutions for a new category of cybersecurity called “Cyber Exposure.” The company manages and measures cyber exposure across a range of traditional IT assets, such as networking infrastructure, desktops, and on-site servers.
Tenable released second-quarter 2021 results in late July. Revenue increased 22% YoY to $130 million. Adjusted net income came in at $10.2 million, or 9 cents per diluted share, compared to $4.7 million, or 4 cents per diluted share, in the prior-year period. In addition, the company generated free cash flow of $15 million, up 127% YoY. Cash and short-term investments ended the quarter at $261 million.
On the metrics, CEO Amit Yoran remarked, “We are pleased with results for the second quarter as calculated current billings, and revenue growth accelerated from strong customer adds and large deals.”
Management claims that Tenable’s solutions offer the broadest coverage of the government-issued common vulnerabilities and exposures. For instance, Tenable offers solutions for over 64,000 of the 167,000 issues
When a significant issue is identified, Tenable points out that it resolves it in less than 24 hours, making it among the fastest in the industry. More than 30,000 organizations use Tenable worldwide, and the company boasts serving over 50% of the Fortune 500.
TENB stock hovers slightly above $44, but down 15% so far this year. Given that cybersecurity demand is poised to surge for the foreseeable future, this decline could be a good opportunity to buy TENB shares. They currently trade at 160 times forward earnings and 9.5 times current sales.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
