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Near-Term Outlook for Security Industry: Prospects Look Bright

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The Zacks Security industry comprises companies primarily 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. However, the solutions can be roughly broken down into the following types:

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

Cyber Security: This is an umbrella term, which includes sections like web security, network security, application security and information security, among others.

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

Here are the three major themes in the industry:

  • Frequent cyber-attacks have increased the demand for security solutions. The worrisome trend has not only affected certain companies, but also threatened the national security of some countries. In fact, the coming years might also see a rise in cyber warfare, given terrorist and cyber espionage groups’ widespread access to advanced technology. Firms operating in the security industry are positioned to benefit immensely, given that 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 pushing companies to further increase spending in this space. Increased investments are also driven by ongoing digital transformation and proliferation of smart connected devices supported by artificial intelligence (AI) and its tools like machine learning (ML). However, the growing incidents of AI and ML driven advanced security attacks or “smart attacks” have become a headwind for industry participants, resulting in huge spending over research & development of advanced security software. With the global IT spending on “Security Technology” projected to exceed $124 billion in 2019 by Gartner, the prospects for the industry participants look bright from a near-term perspective, as it spells rise in sales of security products.
     
  • The ever-increasing demand and growing adoption of security products, particularly network, data and cloud security solutions, make the revenue stream for the industry participants pretty stable. Moreover, the highly competitive nature of the industry is encouraging the participants to come up with innovative and relevant products that meet the changing market needs. Further, growing demand for cloud-based security solutions is benefiting cyber security companies. As more or more enterprises transition to the cloud, legacy security solutions are at the risk of becoming less relevant. However, security technologies related to network like firewalls as well as host-based security tools, among others, cannot be implemented effectively on the cloud, which is a setback for cyber-security providers.

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 #16, which places it at the top 6% of 256 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 outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since Mar 31, 2018, the industry’s earnings estimates for the current year have revised upward by 6 cents.

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 Sector, S&P 500

The Zacks Computer Peripheral Equipment industry has outperformed the Zacks S&P 500 composite as well as its own sector in the past year.

The stocks in this industry have collectively gained 21.8% against the Zacks Computer and Technology sector’s decline of 2.6% and the S&P 500’s rally of 1.4%.

One Year Price Performance



Industry’s Current Valuation

Comparing the industry with the Zacks S&P 500 composite on the basis of its price-to-sales ratio (P/S), which is a more relevant multiple for valuing security stocks, we see that the industry’s ratio of 8.91 is higher than the S&P 500’s 3.18 and the sector’s 3.55.

Over the last five years, the industry has traded as high as 11.67X, as low as 6.20X and recorded a median of 7.81, as the charts below show.

Price-to-Sales Ratio (TTM)


Price-to-Sales Ratio (TTM)



Bottom Line

Given the rising sophistication of cybercrimes and data breaches, higher spending on security solutions and growing threat related to digital transformation across most industries should continue to drive the industry’s growth.

Here, we present three stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Sunnyvale, CA, Fortinet, Inc. (FTNT - Free Report) is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. This Zacks Rank #1 stock has gained 53.3% in the past year. The Zacks Consensus Estimate for its current fiscal-year EPS has increased 10 cents to $1.25 over the past 30 days.

 


Qualys, Inc. (QLYS - Free Report) is Redwood City, CA-based provider of cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures help protect their IT systems and applications from cyber-attacks. This Zacks Rank #1 stock has gained 5.3% in the past year. The Zacks Consensus Estimate for its current fiscal-year EPS has increased 6 cents to $1.25 over the past 30 days.

 

Santa Clara, CA-based Palo Alto Networks, Inc. (PANW - Free Report) offers network security solutions to enterprises, service providers and government entities worldwide. The company's next-generation firewall products deliver natively integrated application, user, and content visibility and control through its operating system, hardware and software architecture. This Zacks Rank #2 stock has gained 24.9% in the past year. The Zacks Consensus Estimate for its current fiscal-year EPS has increased 11 cents to 82 cents over the past 30 days.



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