According to VettaFi.com, the largest cybersecurity ETF by assets is the First Trust NASDAQ Cybersecurity ETF (NASDAQ:CIBR), with $4.8 billion in assets under management. I will use the ETF’s 35 holdings as inspiration for finding three of the most undervalued cybersecurity stocks to buy in April 2023.
But how do I decide what makes a cybersecurity stock undervalued? There are so many metrics I could use.
The ETF tracks the performance of the Nasdaq CTA Cybersecurity Index, a collection of companies operating in the cybersecurity segment of the technology and industrials sectors. To be included, a stock must be considered a cybersecurity company by the Consumer Technology Association (CTA).
Except for a minimum market capitalization of $500 million, a minimum 3-month average daily dollar trading volume of $1 million, and a minimum free float of 20%, no valuation metrics are used as part of their valuation.
That said, the fund’s average price-to-sales ratio is 3.67-times. So my three choices will all have a price-sales ratio below the fund’s average.
Here are three of the most undervalued cybersecurity stocks I’ve got my eye on now.
Juniper Networks (JNPR)
Juniper Networks (NYSE:JNPR) is the eighth-largest holding of CIBR, with a weighting of 3.24%. It is up 4.9% year-t0-date, about one-quarter of the return of the Nasdaq 100.
Juniper reported its fourth-quarter results at the end of January. Revenues increased by 11% year-over-year and 2% sequentially to $1.45 billion. As a result, its non-GAAP net income was $213.8 million, 16% higher than in Q4 2021. For 2022, its revenue rose 12% to $5.30 billion with a non-GAAP net income of $642.6 million, 12% higher than in 2021.
The company’s Chief Financial Officer (CFO) commentary gives you a good sense of how the maker of routers and switches’ overall business is doing.
Not only did the company generate record quarterly revenue in Q4 2022, but its Enterprise vertical had 32% growth year-over-year and 16% sequential revenue growth, with 30% year-over-year and 19% sequential AI-driven revenue growth. Lastly, its annual recurring revenue was $294 million at the end of the year, 43% higher than at the end of 2021.
It finished Q4 2022 with net debt of $371.3 million, or a low 3.4% of its market cap. Currently, JNPR stock yields a reasonable 2.6%.
OpenText (NASDAQ:OTEX) is the ninth-largest holding of CIBR with a weighting of 3.22%. It is up 27.5% year-t0-date, 705 basis points higher than the return of the Nasdaq 100.
OpenText provides information management solutions for companies to manage their content and data in the cloud. Based in Canada, it believes the metaverse could represent $4-$5 billion in value by 2030, up from $200 million to $300 million today.
Of the company’s revenue, approximately 83% is recurring. In the first half of fiscal 2023 (December year-end), its total annual recurring revenue was $1.45 billion, 8.8% higher than in 2022, excluding currency. Of its four revenue streams, the business it generates from the cloud is the largest, accounting for 47% of its $1.75 billion in the first six months of the year.
Acquisitions are an important part of the company’s growth strategy. Since 2019, it’s made six purchases, the most recent being Micro Focus, a leading software technology provider that helps companies accelerate their digital transformation.
It paid $5.8 billion or 2.3-times its trailing 12-month revenue for the business. In addition, it expects to find $400 million in cost synergies from the acquisition.
It trades less than 3-times sales and has a trailing 12-month free cash flow of $778 million [key ratios]. That’s a high 7.5% free cash flow yield.
Akamai Technologies (AKAM)
Rounding out this list of undervalued cybersecurity stocks to buy is Akamai Technologies (NASDAQ:AKAM), the 11th-largest holding of CIBR with a weighting of 3.10%. It is down 8.8% year-t0-date, considerably worse than the return of the Nasdaq 100.
InvestorPlace contributor Muslim Farooque recently included Akamai in a group of seven cybersecurity stocks to buy. My colleague’s argument for buying AKAM stock – its security business is growing fast, contributing 42% of the company’s overall revenue in the past year. Oh, and he also likes its profitability with a five-year average net margin of 15%.
Akamai’s traditional business is its Content Delivery Network (CDN), which helps companies improve their end users’ website experience. It does this with more than 240,000 edge servers worldwide that help improve the flow of content to an end-user’s computer.
However, in 2022, it’s also pushed into the cloud, paying $900 million for Linode, a cloud hosting company with data centers in 8 countries. In March, Akamai announced that it would acquire Ondat, a cloud storage provider based in London. Ondat operates as StorageOS, providing cloud-based container storage options for Kubernetes applications.
According to Morningstar.com, virtually every one of its valuation metrics shows that its stock is cheaper than it’s been over the past five years. Yet, its market cap of $12.1 billion is just 14.8-times its 2022 free cash flow of $816.4 million [key ratios]. I consider anything between 12.5-times and 25-times fair value and worth considering.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.