One of the most notable developments in 2020 has been the acceleration in tech adoption due to people working from home and spending more time online. Of course, this has necessitated an increase in spending on cybersecurity to protect users’ data and ensure that corporate operations are not disrupted.
While many expect that some of the 2020 tech trends like eCommerce or remote work could see some reversion as the economy returns to normal in 2020, cybersecurity spending’s growth trajectory is unlikely to be altered.
Criminals are following the money into cyberspace. They are employing increasingly sophisticated tactics to hack user data, conduct phishing operations, or illegally transfer funds. Spycraft is now moving online which was only recently highlighted by the SolarWinds (SWI) hack that was attributed to the Russian government by Secretary of State Mike Pompeo.
Companies continue migrating to cloud systems and enterprise software. While the earlier trend was for data and servers moving to the cloud, now entire applications are being run from the cloud. This makes companies leaner and more powerful, but it also increases points of vulnerability and increases the costs of disruption.
Overall, the global cybersecurity market is expected to grow from $173 billion in 2020 to $270 billion by 2026. This is a cumulative annual growth rate of 10.8% and means there will be plenty of opportunities for investors in the space. Four of the best-positioned companies are Cloudflare (NET), Zscaler (ZS), Okta (OKTA), and FireEye (FEYE).
NET has been an outperformer all year. It’s considered the premier company to prevent DDOS attacks and is used by many major websites. YTD, Cloudflare is up by 349%.
Cloudflare has benefitted from the strong performance of cloud stocks and the cybersecurity sector. However, its gains accelerated following the introduction of its new platform – Cloudflare One. Cloudflare One is a network-as-a-service solution for cloud-based security, performance, and control through a single user interface.
The platform integrates with existing identify-verification software. Analysts have been speculating that the company would be able to start offering new products and services to existing users which would lead to an acceleration in revenues.
Cloudflare’s shares saw a 25% increase following the announcement of Cloudflare One. Shares also jumped another 14% following its Q3 earnings report. This report was notable since revenues started accelerating as they went from a 37% increase in Q2 to a 54% gain in Q3. Although shares are expensive by traditional metrics given its price-to-sales ratio of 59, the company has a remarkable ability to retain customers. Customer acquisition costs are also low since it offers a basic version of its software for free.
NET is rated a Buy by the POWR Ratings. It has an “A” for Trade Grade and a “B” for Industry Rank and Buy & Hold Grade. Among, Software – Security stocks, it’s ranked #12 out of 24.
Following a high-profile hack, it’s common for companies or governments to bring in FEYE to figure out what happened and how to prevent it from happening again. At one point, it was considered one of the leading cybersecurity companies for cloud-based systems, however, it has fallen behind its competitors as indicated by its flattening revenue growth.
However, FEYE’s stock has underperformed its peers and the broader market since 2014. Since January 2016, it’s been range-bound between $10 and $20. Over this period, the PureFunds ISE Cybersecurity ETF (HACK) was up 139%.
However, shares staged a massive breakout from the SWI hack as the market seems to believe that it will create more opportunities for FEYE. While FEYE’s software products have not gained traction, it remains the premier company in terms of incident response and security consulting.
So, FEYE should be considered more of a services business rather than a product business. This means that its multiples, margins, and upside may be limited compared to its peers. However, its stock is quite attractive at current levels. Even after its gains, its price to sales ratio is 6, and it expects earnings growth of 43%.
This attractive valuation combined with its recent, potent catalyst makes it a Buy-rated stock according to the POWR Ratings. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade and Industry Rank. Among Software – Security stocks, it’s ranked #14 out of 24.
In many ways, ZS is the inverse of FEYE, as it’s a complete product-based business. It has a price to sales ratio of 56 and is expecting revenue growth of 52%. Next year, the company expects to become profitable.
YTD, ZS is up 332%. It’s particularly benefited from the sharp increase in remote work since it provides tools that let users securely access external applications and data. This is probably the biggest point of vulnerability for cloud-based systems, and ZS provides an elegant solution. Additionally, ZS is certified to work with all sorts of systems and even has been certified by the government to allow remote access for high-level, secretive matters.
Remote work and cloud computing are secular trends that will keep rising over the long-term. However, there could be a dip due to the economy reopening as some people will be returning to offices. This could create a compelling buying opportunity for long-term investors in ZS sometime in 2021.
ZS is rated a Strong Buy. It has an “A” for Trade Grade and Buy & Hold Grade with a “B” for Peer Grade and Industry Rank. Among Software – Security stocks, it’s ranked #2 out of 24.
OKTA is a cloud-based identity management tool. It allows authorized users to access the tools and gives employees access to a dashboard of all the software they use with a single sign-on. It also gives the company the ability to manage access across their enterprise tools.
OKTA also benefited from the coronavirus conditions. YTD, its stock is up 125%. In its last quarter, it had 42% revenue growth with 76% gross margins. On top of this growth and profit potential, it has remarkable customer retention rates. Further, many analysts believe the company’s pricing power due to the high switching costs of such services especially after a few years as OKTA’s products become weaved into the company’s IT infrastructure.
According to the POWR Ratings, OKTA is rated a Buy. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade and Industry Rank. Among Software – Business stocks, it’s ranked #21 out of 48.
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ZS shares were trading at $200.48 per share on Thursday afternoon, down $0.83 (-0.41%). Year-to-date, ZS has gained 331.14%, versus a 17.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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