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Near-Term Prospects Appear Bright for Security Industry

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The Zacks Security industry comprises companies offering on-premise and cloud-based security solutions. These can be used for identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, to name a few.

Industry participants offer different types of security solutions, most of which can be used interchangeably.  These solutions can be roughly categorized into the following types:

Computer Security: These solutions provide protection from vulnerabilities in both the software and hardware of a computer system. A computer can get infected via non-web things like USB cables, which can then affect the LAN and other systems, damaging important files.

Cybersecurity: This umbrella term includes sections like web security, network security, application security, container security and information security.

Information Security: This is concerned with any form of data-security issue, be it physical data (included under computer security) or digital data (considered part of cybersecurity). Physical data-security issues can be present in non-computer devices, such as telephones.

Here are the four major themes of the industry:

 

  • Frequent cyberattacks have increased the demand for security solutions. This worrisome trend has not only affected certain companies but also threatened the national security of some countries. Notably, the current global health crisis has given rise to new forms of hacking and cybercrimes, which are difficult for firms and individuals to grapple with. Firms operating in the security industry are working hard to address these concerns. Hence, these companies are positioned to benefit as protection against spear phishing, credential-based attack, account takeover and ransomware attacks, among others, has become the need of the hour.
     
  • Enterprises are realizing the need for stricter security measures, which is compelling these firms to increase spending in this space. Investments are also rising on the ongoing digital transformations, and proliferation of smart connected devices supported by AI and tools like ML. However, growing incidents of AI- and ML-driven advanced security attacks or “smart attacks” have become headwinds for industry players, resulting in huge spending on advanced security solutions. Moreover, tech giants are increasing their cybersecurity budgets. For instance, IBM (IBM - Free Report) is reportedly to boost its cybersecurity spending by double-digit percentage points in 2020. The growing enterprise IT spending on security is being driven by the mounting pressure on chief information security officers to take action against the rising incidents of advanced security breaches.
     
  • The ever-increasing demand for network, data and cloud security solutions keeps the companies’ revenues stable in this industry. As more and more enterprises transition to cloud, legacy security solutions face the risk of becoming less relevant. However, security technologies related to networks like firewalls and host-based security tools, among others, cannot be implemented effectively on cloud, which is a setback for cybersecurity providers. In addition, the growing adoption of cloud-native technologies, such as containers and serverless infrastructure, particularly in DevOps, is a key catalyst. The spurt in containerized applications, running both on-premises and in the cloud, is boosting the container security market. Per Arcluster, the container security market is estimated to touch $2.25 billion by 2023.
     
  • The rising number of connected devices among enterprises calls for efficient management and stronger security in their IoT landscape. Currently, IoT focuses mainly on device profiling and inventory, neglecting the need to detect and prevent advanced attacks. This has created a security gap and the perfect opportunity for cybercriminals to launch the fifth and sixth generations of cyberattacks to hack devices, distort and influence their operations or obtain critical information to generate large-scale damage. Per Allied Market Research, the global IoT security market size is anticipated to reach $73.92 billion by 2026, at a CAGR of 31.2% from 2019. The growing numbers of ransomware attacks on IoT devices worldwide as well as the increasing IoT security regulations are mainly driving the IoT security market. Fortinet (FTNT - Free Report) is one of the leading players in the IoT security market currently, with others like Palo Alto (PANW - Free Report) and Check Point (CHKP - Free Report) following suit.

 

Zacks Industry Rank Indicates Bright Prospects

The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #54, which places it among the top 21% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

 

Industry Outperforms the S&P 500

The Zacks Security industry has outperformed the S&P 500, but underperformed the Zacks Computer and Technology sector in the past year.

The stocks in this industry have collectively gained 14.2% compared with the Zacks Computer and Technology sector’s rally of 23% and the S&P 500’s 7.3%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of price-to-sales ratio (P/S), which is a commonly used multiple for valuing the Security stocks, the industry is currently trading at 8.99X, higher than the S&P 500’s 3.46X and the sector’s 4.43X.

Over the last five years, the industry has traded as high as 10.91X, as low as 5.82X and recorded a median of 7.7X, as the charts below show.

Price-to-Sales Ratio (TTM)

Price-to-Sales Ratio (TTM)

 

Stocks to Consider

Given the rising sophistication of cybercrimes and data breaches, higher spending on security solutions and increasing threats related to digital transformation across most end markets will keep driving growth for the industry participants.

Furthermore, the global economy is currently facing a challenging situation pertaining to the coronavirus pandemic since this January. The virus outbreak has affected most industries, including the security industry. Nonetheless, with cybercriminals taking advantage of this widespread panic, the security industry is likely to benefit as demand for their solutions and services will likely shoot up.

Here, we are presenting three stocks from the Zacks Security industry that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Sunnyvale, CA, Fortinet has appreciated 66% in the past year. The Zacks Consensus Estimate for full-year 2020 earnings has moved up 1.4% to $2.81 over the past 60 days.

Headquartered in Tel Aviv, Israel, Check Point Software has rallied 10.2% in a year’s time. The Zacks Consensus Estimate for the ongoing-year earnings moved 4.4% north to $6.61 over the past week.

Dallas, Texas-based Zix Corporation (ZIXI - Free Report) has lost 23.6% over the past year. The Zacks Consensus Estimate for current-year earnings has moved upward by a penny to 57 cents in 30 days’ time.

We also present two stocks with a Zacks Rank #3 (Hold) that are currently in focus.

Foster City, CA-based Qualys, Inc. (QLYS - Free Report) has appreciated 36.5% in the past year. The Zacks Consensus Estimate for this year’s earnings has remained unchanged at $2.50 over the past 30 days.

Milpitas, CA-based FireEye, Inc. (FEYE - Free Report) has depreciated 1.6% in the past year. The Zacks Consensus Estimate for 2020 earnings has remained unrevised at 5 cents over the past 30 days.

 

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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