The cyber-security industry has been putting up an impressive show on the bourse, of late, with the slew of cyber attacks, over the past few months, playing the supporting role. Cisco’s (CSCO - Free Report) latest report hints at another attack hovering over Ukraine, once again, which might cause a complete blackout in the country.
Per the findings of Talos — a cyber-intelligence unit of Cisco — hackers have infected more than 500,000 routers and storage devices across 54 nations. It is feared that this sophisticated malware, VPNFilter, has infected the devices of Linksys, MikroTik, Netgear (NTGR - Free Report) , TP-Link and QNAP.
The sensitivity of this cyber attack can be understood with the fact that the malware codes discovered in the infected devices were similar to the ones used earlier to attack Ukraine. In 2015 and 2016, cybercriminals had wrongfully accessed and paralyzed the country’s power utility networks, causing nationwide blackouts and factory shutdowns. Therefore, Cisco is suspecting another similar blackout, this time too, ahead of Ukraine’s Constitution Day on June 28.
While the jitters sent across the globe by Cisco’s latest report had yet not dissipated, another massive cybercrime report hit headlines on May 28. This Monday, two of the largest Canadian banks reported fraudsters gaining access to the personal and financial information of almost 90K of their customers.
Fresh Boost for Security Stocks
Nevertheless, cyberattacks do not spell bad news for all companies. Particularly, cyber-security stocks have been on a roll since the second half of 2017, thanks to the plaguing attacks which created havoc across the globe last year.
Some of the most notable ones included the two back-to-back ransomware attacks — WannaCry or WannaCrypt in May and Petya in June — followed by the massive data breach at Equifax (EFX - Free Report) in September. In addition to these, the data theft and ransom paid by Uber disclosed in November further fueled the bullish momentum of the stocks in this space.
In 2018, so far, the ETFMG Prime Cyber Security ETF (HACK) has returned 19%, outperforming the Technology Select Sector SPDR ETF (XLK) and S&P 500’s gains of 9.3% and 0.4%, respectively. The Cyber Security ETF has gained 4.3% in a month’s time.
Encouragingly, the latest cyber attacks will spur demand for security-related products among companies and governments, thereby boosting top and bottom lines of cyber-security providers. We believe this would further drive the share prices of cyber-security stocks.
Investors Should Bank on This Opportunity
Though billions of dollars and data are lost due to cyber crime, there is a positive side to it. Cyber-security companies stand to gain from data breaches as the chances of security-related purchases shoot up.
Furthermore, with rapid technological advancement, organizations are increasingly adopting the Bring Your Own Device (BYOD) policy to enhance employee productivity, with anytime/anywhere access. This trend, in turn, calls for stricter data security measures.
We believe the urgency for stricter security measures will compel enterprises, as well as governments to increase spending on cyber-security software. Per the latest report by Gartner, global enterprise security spending will reach $96.3 billion in 2018 — marking 8% growth from the 2017 expected level of $89 billion.
Another market research firm, Markets and Markets, in its July 2017 report, stated that worldwide cyber-security spending will likely reach $231.94 billion by 2022.
Here, we focus on three stocks that are anticipated to benefit from this elevated spending.
FireEye Inc. (FEYE - Free Report) is a specialized provider of a security platform against cyber attacks to enterprises and governments. The company’s consistent efforts toward bringing in new and advanced products have been attracting a wide range of customers. Notably, FireEye’s Essentials product, which is a lower-cost and simpler version of the FireEye Global Threat Management platform, targets smaller and mid-market companies. This Zacks Rank #3 (Hold) company’s Cloud MVX and MVX Smart Grid offerings, a lower-cost intelligent threat detection solution, targets large enterprises, as well as mid-market businesses. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Furthermore, the company’s move of shifting its business model to subscription-based cloud services from selling software is praiseworthy. Though shifting the business model to subscription-based services will generate lower revenues initially, but the same will stabilize the top line over the long run, as organizations usually renew subscriptions with the existing products or even with higher versions. Moreover, subscription-based services generate higher gross margins.
Palo Alto Networks, Inc. (PANW - Free Report) enables firms, service providers and government bodies to impose tighter security measures through its network security platform. The company has been growing rapidly on the back of its innovative next-generation security platforms. Its security platforms have innovative traffic classification engine that helps it identify network traffic by application, user and content. Palo Alto’s security platforms simplify security infrastructure for organizations by eliminating the need for multiple, stand-alone security appliances, and software products. This reduces the total cost of ownership, thereby giving the organization a competitive edge.
Also, we believe its strategic acquisitions with the likes of LightCyber, Morta Security and Cyvera will continue to bolster revenues. These acquisitions helped this Zacks #3 Ranked company expand the functionality of its enterprise security platform, in turn, bringing in more customers.
Additionally, Palo Alto has made strategic partnerships with the likes of VMware and Aruba Networks to expedite growth. These strategic partnerships bring in customers for Palo Alto, thus boosting its top line.
Proofpoint Inc. (PFPT - Free Report) is a leading security-as-a-service provider that focuses on cloud-based solutions for threat protection, compliance, archiving & governance, and secure communications. As more and more enterprises are migrating to cloud, demand for better cyber-security measures has been on the rise, which is driving Proofpoint’s revenues. Over the past few quarters, the company has been witnessing strong demand for its cyber-security suites from enterprises transitioning to cloud, particularly to Office 365.
Additionally, Proofpoint has made strategic acquisitions to expedite growth. These buyouts have not only expanded the company’s product portfolio, but also its customer and revenue base. We believe this Zacks Rank #3 company will continue with its strategy of growing through acquisitions, which will be conducive to top-line growth.
Considering the above-discussed factors, it makes sense to invest in this hot industry group as cyber-security players are likely to witness stellar growth in the near term.
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