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Near-Term Prospects Look Encouraging 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. The worrisome trend has not only affected certain companies but also threatened the national security of some countries. Notably, the current global health crisis related to the coronavirus outbreak has given rise to new forms of hacking and cybercrimes, which are difficult for firms and individuals to deal with. Firms operating in the security industry are working hard to address these concerns. Hence, these companies are positioned to benefit immensely 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 pushing them to increase spending in this space. Increased investments are also driven by ongoing digital transformation 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 a headwind for industry participants, resulting in huge spending on advanced security solutions. Moreover, tech giants are also increasing their budgets for cybersecurity. For instance, IBM (IBM - Free Report) plans to boost its cybersecurity spending by double-digit percentage points in 2020. Growing enterprise IT spending on security is being driven by mounting pressure on chief information security officers to take action against rising incidents of advanced security breaches.
  • The ever-increasing demand for network, data and cloud security solutions makes revenues for industry participants pretty stable. 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 networks like firewalls and host-based security tools, among others, cannot be implemented effectively on the cloud, which is a setback for cybersecurity providers. Moreover, 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 growing 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 generation of cyberattacks to hack into devices, distort and influence their operations or obtain critical information to generate large-scale damage. Per Allied Market Research, global IoT security market size is anticipated to reach $73.92 billion by 2026, at a CAGR of 31.2% from 2019. Growing number of ransomware attacks on IoT devices worldwide and increasing IoT security regulations are among the major reasons 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 #96, which places it among the top 38% of 254 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 Underperforms Sector & S&P 500

The Zacks Security industry has underperformed the Zacks S&P 500 as well as its own sector in the past year.

The stocks in this industry have collectively lost 17.7% compared with the Zacks Computer and Technology sector’s decline of 4.3% and the S&P 500’s 13.4%.

One Year Price Performance

Industry’s Current Valuation

On the basis of price-to-sales (P/S), which is a commonly used multiple for valuing the Security stocks, the industry is currently trading at 6.8X, higher than the S&P 500’s 2.65X and the sector’s 3.36X.

Over the last five years, the industry has traded as high as 11.67X, as low as 5.83X and recorded a median of 7.79X, 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 should continue to drive growth for the industry participants.

Moreover, the global economy is currently facing a challenging situation pertaining to the outbreak of the coronavirus pandemic, since January this year. The outbreak has affected most industries adversely, including the security industry. However, with cybercriminals taking advantage of the panic, the security industry is likely to benefit as demand for their solutions and services is expected to increase.

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.

Foster City, CA-based Qualys, Inc. (QLYS - Free Report) has gained 0.3% in the past year. The Zacks Consensus Estimate for 2020 earnings has increased 0.8% to $2.58 over the past 30 days.

Headquartered in Sunnyvale, CA, Fortinet has returned 18.4% in the past year. The Zacks Consensus Estimate for 2020 earnings has decreased 1.8% to $2.67 over the past 30 days.

Milpitas, CA-based FireEye, Inc. (FEYE - Free Report) has lost 30.7% in the past year. The Zacks Consensus Estimate for 2020 earnings has decreased 4.8% to 20 cents over the past 30 days.

We also present a stock with a Zacks Rank #3 (Hold) that is currently in focus.

Tel Aviv, Israel-based Radware Ltd. (RDWR - Free Report) has lost 22.6% in the past year. The Zacks Consensus Estimate for 2020 earnings has remained steady at 86 cents over the past 30 days.

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