The massive escalation in data breaches over the past couple of years has increased the appeal of cyber security stocks to investors. Both governments and companies have had to spend big money in an effort to keep their names out of security breach headlines with an estimated $150 billion being spent over the past two years.
To better illustrate how cyber security has been fast edging up on the list of priorities for major organizations, JP Morgan Chase raised its annual cybersecurity budget to $500 million from $250 million while the U.S government is expected to spend about $19 billion in 2017. On the other hand, Bank of America revealed that it wouldn’t be limiting itself to any specific budget in order to protect itself from cybercrime.
Although cyber security stocks haven’t performed exceptionally well as the PureFunds ISE Cyber Security ETF (NYSE: HACK) has only gained roughly 4.5 percent on a year-to-date basis, a number of events witnessed in the last couple of months could change this narrative going into 2017. The biggest and most notable event for cyber security was perhaps centered on the recently concluded U.S presidential election.
Political and economic implications of cybercrime
The hacking of the Democratic National Convention’s (DNC) servers and subsequent public dump of presidential candidate Hillary Clinton’s campaign chief John Podesta emails by Wikileaks could have just cost her the election. According to U.S intelligence officials, Russian hackers were probably behind the attack which has without a doubt raised the awareness of the importance of cyber security. As a matter of fact, the policy section of president elect Donald Trump’s website states that he plans to order a review of all U.S cyber defense and vulnerabilities which bodes well for cyber stocks.
A recently released market report by Cybersecurity Ventures gives a glimpse of just how much cybercrime has far reaching effects on the global economy. The company projects that cybercrime will cost the world approximately $6 trillion annually by 2021 and founder and editor-in-chief of cybersecurity Ventures Steve Morgan explains why:
“IT analyst forecasts are unable to keep pace with the dramatic rise in cybercrime, the ransomware epidemic, the refocusing of malware from PCs and laptops to smartphones and mobile devices, the deployment of billions of under-protected Internet of Things (IoT) devices, the legions of hackers-for-hire, and the more sophisticated cyber-attacks launching at businesses, governments, educational institutions, and consumers globally.”
With the Obama administration contemplating covert action against Russia in retaliation to their interference in the elections, the prospects of triggering a cyber-war has made cyber security stocks even more appealing going forward.
4 stocks to consider
FireEye (NASDAQ: FEYE), in spite of losing 37 percent of its value on YTD basis and Goldman Sachs downgrading the company’s stock back in November from “neutral” to “sell” while reducing its price target to $11 from $15 still remains one stock to watch closely.
This is because FireEye has been negatively affected by a couple of factors such as its relatively high debt which stands at about 31 percent of enterprise value compared to an overall benchmark of 25 percent, slowing growth and weak cash flow.
But luckily for investors, the company has taken a number of steps to stimulate earnings growth and drive shareholder value whose effects should begin being felt by investors sometime in the next year.
One such step is the company’s decision to separate its MVX services which had previously been tied to the company’s devices in order to introduce new offerings. According to the CEO Kevin Mandia, this separation would basically be splitting the two primary functions of the MVX analysis into two components: the network sensor and the MVX analysis engine which has enabled the company to introduce the Cloud MVX.
Cloud MVX provides the company a public cloud deployment of the MVX engine and is one of two new offering introduced during the third quarter earnings presentation.
Palo Alto Networks (NASDAQ: PANW) is one of the fastest growing cyber security stocks with sales growing at least 50 percent for the past seven straight quarters. The company’s shares are however down 27 percent on an YTD basis in spite of the impressive revenue growth which still continues going by the most recent quarterly results.
Though it continues to post loses, its billings rose 45 percent to $572.4 million surpassing analysts’ expectations of $561.8 million and had FY2016 billings of $1.9 billion, a 56 percent increase compared to the prior year. While some pundits may be quick to point out that Palo Alto’s billings have been slowing, it still remains ahead of peers such as FireEye.
At current prices of about $128 per share (as of the time of writing) investment banking firm Imperial Capital estimates that the company shares have a 32 percent upside potential based on the fact that it is continuing to gain market share from rivals.
CyberArk (NASDAQ: CYBR) is up a little over 9 percent on an YTD making it one of the few cyber security stocks to be in the green this year. Among the major highlights of the company’s most recent earnings report is that the top line grew 37.2 percent year over year to $54.9 million fueled by better than expected demand for its privileged account security platform.
Unlike FireEye and Palo Alto Networks which have been posting losses as they struggle to reign in costs, CyberArk is profitable. One contributing factor to this difference is that CyberArk which is based in Israel pays lower salaries and compensation compared to its Silicon Valley counterparts.
It is also important for investors to note that one of CyberArk’s strategies has been to grow through acquisitions such as the two it made last year. According to the company’s guidance, the future looks quite bright as it raised full year revenue expectations from$212.5 million to $215.3million.
Check Point Software (NASDAQ: CHKP) another Israeli based cyber security firm is up 4.4 percent on an YTD basis. Like CyberArk, this company is also profitable although it has a relatively slower sales growth compared to the rest of the companies mentioned. It is worth mentioning that even as revenue grew only 6 percent year over year and operating costs rose 11 percent over the same period, the company was able to post an 8 percent improvement in earnings.
Check Point has a great balance sheet with $1.3 billion in cash and zero debt which significantly reduces the downside risk of investing in it. In fact, researchers at Wells Fargo in a recent note to investors reaffirmed a “Hold” rating on the shares most likely since its fundamentals remain solid in the near term. At current prices of $84.9 per share, investors shouldn’t remain on the sidelines for too long if they want to get a stake in the company.