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3 Security Stocks to Keep an Eye On in a Challenging Industry
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The Zacks Security industry is benefiting from solid demand for cybersecurity offerings, as well as the heightening need for secure networks and cloud-based applications amid the pandemic-induced remote-working and online learning wave. Companies in this space are benefiting from rising demand for IT security solutions owing to the surging number of data breaches. Increasing requirement for privileged access security on the back of digital transformation and cloud migration strategies are also fueling demand for cybersecurity solutions. Industry participants like Qualys (QLYS - Free Report) , Proofpoint and Radware (RDWR - Free Report) are gaining from the aforementioned trends. However, emergence of the Delta variant strain and spike in infection rates across several parts of the world, resulting in stringent lockdowns, might affect recovery in IT spending. Also, lingering impacts of the coronavirus pandemic-led business volatility are a concern.
Industry Description
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 three types — Computer Security, Cybersecurity and Information Security. Computer Security solutions provide protection from vulnerabilities in both the software and hardware of a computer system. The Cybersecurity term includes sections like web security, network security, application security, container security and information security. Information Security is concerned with any form of data-security issue, be it physical or digital data.
3 Trends Influencing the Future of the Security Industry
Rising Cyber Threats Boost Demand for IT Security: Frequent cyberattacks are spurring demand for security solutions. This worrisome trend has not only affected certain companies but also threatened the national security of some countries. Notably, the prevailing global health crisis has given rise to newer 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.
Cloud Migration Hurting On-Premise Security Demand: Traditional spending on on-premise information security hardware and software is weakening amid the COVID-19 pandemic-induced remote-working wave and accelerated cloud migrations for digital transformation.
Evolving COVID-19 Situation Might Hurt Tech Spending: According to the latest report from Gartner, enterprises are likely to spend more on technology as they realize that sound technological infrastructure is the key to positive business outcomes. Therefore, the independent research firm estimates worldwide IT spending to increase 8.6% year over year and reach $4.2 trillion in 2021. However, with the emergence of the more contagious coronavirus variant — Delta — several parts of the world, including India, Australia, Indonesia and Japan, are grappling with massive spike in infection rates, leading to stringent lockdowns. Even some parts of the United States are witnessing Delta variant outbreaks. This could affect IT spending across small- and medium-sized businesses, globally, as organizations may push back their investments in big and expensive technology products due to the global economic slowdown concerns. The uncertainty in business visibility could put a dent on the industry’s performance in the near term.
Zacks Industry Rank Indicates Bleak Near-Term Prospects
The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #177, which places it among the bottom 30% 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 bleak 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are not optimistic on this group’s earnings growth potential. The industry’s earnings estimate for 2021 has moved down to earnings of 86 cents as against earnings of $1.34 as of Aug 31, 2020.
Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector and S&P 500
The Zacks Security industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.
The industry has gained 46.8% during this period compared with the S&P 500’s 30.4% rally and the broader sector’s 34.9% appreciation.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing price-to-sales ratio (P/S), which is a commonly-used multiple for valuing the Security stocks, the industry is currently trading at 11.47X, higher than the S&P 500’s 5.02X and the sector’s 5.83X.
Over the last five years, the industry has traded as high as 11.90X, as low as 5.65X and recorded a median of 7.76X, as the charts below show.
Price-to-Sales Ratio (TTM)
Price-to-Sales Ratio (TTM)
3 Stocks to Watch Out For
Qualys: This Zacks Rank #1 (Strong Buy) company offers cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures, thus helping protect their IT systems and applications from cyber-attacks. You can see the complete list of today’s Zacks #1 Rank stocks here.
Qualys is gaining from the surging demand for security and networking products amid the coronavirus crisis as a massive global workforce is working remotely. Accelerated digital transformations by organizations are also fueling demand for the company’s cloud-based security solutions.
The Zacks Consensus Estimate for 2021 earnings has moved 10.6% north to $3.02 per share over the past 30 days. Qualys’ shares have been up 2.5% in the past year.
Price and Consensus: QLYS
Proofpoint: Proofpoint is one of the leading security-as-a-service (SaaS) providers of on-demand data protection solutions to large and mid-sized organizations. This Zacks Rank #2 (Buy) company offers cloud-based solutions for threat protection, compliance, archiving and governance, and secure communications.
Proofpoint is benefiting from accelerated cloud migration by organizations amid the COVID-19 pandemic. The company’s constant focus on improving and expanding its capabilities and offerings is helping it win larger deals. Notably, it reinvests about 20% of annual revenues in R&D, which is quite significant.
Moreover, given the current security scenario, wherein enterprises are transitioning their workloads and data to the cloud, every point on the network is vulnerable to security breaches. Focus on domains like cloud application security, information protection, deep threat intelligence, compliance, email authentication and employee training on security awareness are, therefore, important for companies to keep pace with the growing sophistication of cyberattacks.
Notably, continued enhancements across Proofpoint’s product portfolio cover all the aforementioned aspects.
Furthermore, increased interest in new archiving features like supervision, eDiscovery and analytics visualization, particularly from firms in regulated industries, such as healthcare and financial services, are driving demand for the company’s digital risk products.
This Sunnyvale, CA-based stock has rallied 54.7% over the past year. The consensus mark for its current-year earnings has moved 12 cents north to $2.20 per share in 30 days’ time.
Price and Consensus: PFPT
Radware: The company develops, manufactures and markets products that manage and direct Internet traffic among network resources to enable continuous access to Web sites and other services, applications and content based on Internet protocol.
Radware is gaining traction from stellar software growth, backed by a solid uptick in public cloud and security offerings. Also, it is benefiting from growing demand for consistent application security across multi-cloud environments, which is aiding revenue growth.
This Zacks Rank #2 stock has appreciated 27.6% in the past year. The consensus mark for the ongoing year’s earnings has been revised 6.9% upward to 77 cents per share in the past 30 days.
Price and Consensus: RDWR
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3 Security Stocks to Keep an Eye On in a Challenging Industry
The Zacks Security industry is benefiting from solid demand for cybersecurity offerings, as well as the heightening need for secure networks and cloud-based applications amid the pandemic-induced remote-working and online learning wave. Companies in this space are benefiting from rising demand for IT security solutions owing to the surging number of data breaches. Increasing requirement for privileged access security on the back of digital transformation and cloud migration strategies are also fueling demand for cybersecurity solutions. Industry participants like Qualys (QLYS - Free Report) , Proofpoint and Radware (RDWR - Free Report) are gaining from the aforementioned trends. However, emergence of the Delta variant strain and spike in infection rates across several parts of the world, resulting in stringent lockdowns, might affect recovery in IT spending. Also, lingering impacts of the coronavirus pandemic-led business volatility are a concern.
Industry Description
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 three types — Computer Security, Cybersecurity and Information Security. Computer Security solutions provide protection from vulnerabilities in both the software and hardware of a computer system. The Cybersecurity term includes sections like web security, network security, application security, container security and information security. Information Security is concerned with any form of data-security issue, be it physical or digital data.
3 Trends Influencing the Future of the Security Industry
Rising Cyber Threats Boost Demand for IT Security: Frequent cyberattacks are spurring demand for security solutions. This worrisome trend has not only affected certain companies but also threatened the national security of some countries. Notably, the prevailing global health crisis has given rise to newer 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.
Cloud Migration Hurting On-Premise Security Demand: Traditional spending on on-premise information security hardware and software is weakening amid the COVID-19 pandemic-induced remote-working wave and accelerated cloud migrations for digital transformation.
Evolving COVID-19 Situation Might Hurt Tech Spending: According to the latest report from Gartner, enterprises are likely to spend more on technology as they realize that sound technological infrastructure is the key to positive business outcomes. Therefore, the independent research firm estimates worldwide IT spending to increase 8.6% year over year and reach $4.2 trillion in 2021. However, with the emergence of the more contagious coronavirus variant — Delta — several parts of the world, including India, Australia, Indonesia and Japan, are grappling with massive spike in infection rates, leading to stringent lockdowns. Even some parts of the United States are witnessing Delta variant outbreaks. This could affect IT spending across small- and medium-sized businesses, globally, as organizations may push back their investments in big and expensive technology products due to the global economic slowdown concerns. The uncertainty in business visibility could put a dent on the industry’s performance in the near term.
Zacks Industry Rank Indicates Bleak Near-Term Prospects
The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #177, which places it among the bottom 30% 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 bleak 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are not optimistic on this group’s earnings growth potential. The industry’s earnings estimate for 2021 has moved down to earnings of 86 cents as against earnings of $1.34 as of Aug 31, 2020.
Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector and S&P 500
The Zacks Security industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.
The industry has gained 46.8% during this period compared with the S&P 500’s 30.4% rally and the broader sector’s 34.9% appreciation.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing price-to-sales ratio (P/S), which is a commonly-used multiple for valuing the Security stocks, the industry is currently trading at 11.47X, higher than the S&P 500’s 5.02X and the sector’s 5.83X.
Over the last five years, the industry has traded as high as 11.90X, as low as 5.65X and recorded a median of 7.76X, as the charts below show.
Price-to-Sales Ratio (TTM)
Price-to-Sales Ratio (TTM)
3 Stocks to Watch Out For
Qualys: This Zacks Rank #1 (Strong Buy) company offers cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures, thus helping protect their IT systems and applications from cyber-attacks. You can see the complete list of today’s Zacks #1 Rank stocks here.
Qualys is gaining from the surging demand for security and networking products amid the coronavirus crisis as a massive global workforce is working remotely. Accelerated digital transformations by organizations are also fueling demand for the company’s cloud-based security solutions.
The Zacks Consensus Estimate for 2021 earnings has moved 10.6% north to $3.02 per share over the past 30 days. Qualys’ shares have been up 2.5% in the past year.
Price and Consensus: QLYS
Proofpoint: Proofpoint is one of the leading security-as-a-service (SaaS) providers of on-demand data protection solutions to large and mid-sized organizations. This Zacks Rank #2 (Buy) company offers cloud-based solutions for threat protection, compliance, archiving and governance, and secure communications.
Proofpoint is benefiting from accelerated cloud migration by organizations amid the COVID-19 pandemic. The company’s constant focus on improving and expanding its capabilities and offerings is helping it win larger deals. Notably, it reinvests about 20% of annual revenues in R&D, which is quite significant.
Moreover, given the current security scenario, wherein enterprises are transitioning their workloads and data to the cloud, every point on the network is vulnerable to security breaches. Focus on domains like cloud application security, information protection, deep threat intelligence, compliance, email authentication and employee training on security awareness are, therefore, important for companies to keep pace with the growing sophistication of cyberattacks.
Notably, continued enhancements across Proofpoint’s product portfolio cover all the aforementioned aspects.
Furthermore, increased interest in new archiving features like supervision, eDiscovery and analytics visualization, particularly from firms in regulated industries, such as healthcare and financial services, are driving demand for the company’s digital risk products.
This Sunnyvale, CA-based stock has rallied 54.7% over the past year. The consensus mark for its current-year earnings has moved 12 cents north to $2.20 per share in 30 days’ time.
Price and Consensus: PFPT
Radware is gaining traction from stellar software growth, backed by a solid uptick in public cloud and security offerings. Also, it is benefiting from growing demand for consistent application security across multi-cloud environments, which is aiding revenue growth.
This Zacks Rank #2 stock has appreciated 27.6% in the past year. The consensus mark for the ongoing year’s earnings has been revised 6.9% upward to 77 cents per share in the past 30 days.
Price and Consensus: RDWR