Not a second goes by when you, your family, friends and even your entire company isn’t under attack. Your phone, tablet, laptop Wi-Fi network and even your appliances — if anything is on a wired or wireless network, somebody or something wants to get access and cause mayhem for profit or just the sick gratification of causing harm. This means you should protect your devices with cybersecurity solutions and your portfolio with cybersecurity stocks.
Let’s review what is happening. It starts with phishing. Proper-appearing emails asking for account confirmation can open up hell for those that click “continue.” Then malware can embed itself into any device and provide all sorts of tracking or other data, including for theft. And folks in the evil world of hacking also know that social engineering can get you to click or open devices with disaster at the ready.
And companies and governments and all sorts of organizations have suffered at the hands of ransomware. It can lock up data and even whole networks unless a payment is made — without any guarantees.
Then companies face all sorts of even more threatening actions. For example, distributed denial-of-service (DDOS) attacks can inundate servers, causing them to lock up. These attacks result in web pages or web services completely shutting down.
These — and plenty of other threats — make cybersecurity an absolute necessity. And it shows in business investment in hardware, software and services. And even for 2020, with business capital expenditures dropping significantly overall, investing in global cybersecurity products and services continues to rise.
Source: Global Cybersecurity Spending — Source: IDC & Bloomberg
The Cybersecurity Market Is Booming
The International Data Corporation is one of the leading data and intelligence companies for information technology, communications and general technology. It has recently reported that from 2016 through 2021, spending on cybersecurity products and services should continue to result in an 8% compound annual growth rate (CAGR).
And that is a big growth rate for a multi-multi-billion-dollar market.
So, the companies behind all of our devices and networks are increasingly a big deal. And even with all of the economic and market mayhem, the stock market is paying attention to leading cybersecurity names.
The Bloomberg Global Infrastructure Software Index, which compiles leading companies in the network and security market, has returned 64.2% since March 16. That’s 1.8 times better than the return of the S&P 500 and 1.3 times better than even the S&P Information Technology Index.
Source: Bloomberg Global Infrastructure Software Index — Source: Bloomberg
And with remote work remaining firmly in place, the need for network capabilities and security has soared. As novel coronavirus cases skyrocket, “normal” looks far away. Plus, if and when vaccines and treatments are developed and deployed, cybersecurity needs aren’t going to disappear.
So, even as plenty of the product and services companies have gotten a lot of market attention this year, there are plenty of reasons to nibble on these cybersecurity stocks.
Here are some of the companies that have my attention:
- CrowdStrike Holdings (NASDAQ:CRWD)
- Okta (NASDAQ:OKTA)
- Cisco Systems (NASDAQ:CSCO)
- Cloudflare (NYSE:NET)
- Zscaler (NASDAQ:ZS)
- Check Point Software Technologies (NASDAQ:CHKP)
- Palo Alto Networks (NYSE:PANW)
Each of these cybersecurity stocks has compelling reasons for an investor to keep them on their watch list.
Cybersecurity Stocks: CrowdStrike Holdings (CRWD)
CrowdStrike is an appropriately named company that provides all sorts of protections for companies, networks and end-point users and customers. Revenue over just the trailing year is up by 92.7%. But there’s more proof that the company isn’t just a flash. Over the past five years, the compound annual growth rate (CAGR) for company revenue has been running at 96.9%. This makes its sales team more than high-performing.
Source: CrowdStrike Holdings Revenue — Source: Bloomberg
Now for the less-than-stellar news. The company is all fired up over sales and growth, and as a result, margins are not that great. In fact, operating margins are running at a loss of 30.3%, making for a not-so-positive return on shareholder equity. But the company has no real debt and piles of cash amounting to 240% of liabilities going out for the next 12 months. So, it’s all about peddle-to-the-mettle growth.
The stock reflects the go for growth as it has returned 208.2% since March 16.
Source: CrowdStrike Total Return — Source: Bloomberg
The stock has recently taken a pause — starting July 9 — and has pulled back by 13.3%. Valuations are sky-high, but that’s the market for this sector making for a nibble of a buy on the pullback.
Okta is an interesting company that makes life simpler for users. When you log into your Google Cloud, Box (NYSE:BOX), Amazon (NASDAQ:AMZN) or even your LinkedIn accounts you will be using the security of Okta. And it makes it easy to access accounts from laptops, tablets and phones. And it keeps password and usernames easy for users while keeping them safe on all sorts of platforms.
The company states that it has over 3,000 corporate customers serving millions upon millions of users. And all of this comes from a company that just came to the public market back in 2017.
Revenue for the trailing year is up by 46.8%. This continues to be par for the course as annual revenues for the past five years continue to climb at a rate of 59.9% on a CAGR basis.
Source: Okta Revenue — Source: Bloomberg
So, sales growth is working. But cost control and investment for growth is not helping margins. The operating margin for the company is running at a negative 31.7% for a negative return on shareholders’ equity.
But the stock continues to grab attention, including the synthetic participation in various technology exchange-traded funds. The stock has returned a whopping 1,083.4% since its IPO.
Source: Okta Total Return — Source: Bloomberg
Now, it does have lots of cash and equivalents which provides coverage over liabilities out a year running at 290%. But it also has debt which is pretty high at 56.5% of assets. But given its client base and users and the go-go growth in revenue, it should continue to garner positive stock market attention as well as from creditors if needed or wanted.
Cybersecurity: Cisco Systems (CSCO)
Cisco Systems continues to be one of the go-to providers of what makes networks, networks. Routers, switches, servers and the software needed to make them work securely are the products and services that are well-known in the market for data, voice and video around the globe. And all of the data centers around the globe — including those in my favorite data center real estate investment trusts (REITs) like Digital Realty Trust (NYSE:DLR) and Corporate Office Properties (NYSE:OFC) — have Cisco products and services humming away behind windowless walls.
Cisco may be an old-line company. But it is still very relevant for networks and cybersecurity. For without at least some of its products, the other more popular companies would be severely curtailed.
Revenue growth is there running at 5.2% for the trailing year. And revenue growth has been dependable over the past 20 years, expanding by an average of 3.8% on a CAGR basis.
Source: Cisco Systems Revenue — Source: Bloomberg
Cisco does keep selling more, but it does so at a much more profitable basis than many of its peers. Operating margins are fat at 27.4%, which in turn fuels a return on shareholder equity of a very attractive level of 29.7%.
The company has ample cash running at 150% of current liabilities out one year. And it has low debt at a level of only 25.2% of assets.
The stock has returned 93.5% for the past trailing five years which is way better than the general S&P 500.
Source: Cisco Systems Total Return — Source: Bloomberg
And despite that very good return, the stock is still a value compared to many of its peers in networking and security. The stock is valued at only 3.9 times trailing sales and only 5.5 times its intrinsic value. And then we come to a dividend — yes, a dividend. It yields 3.1% and has been climbing in the distribution by an average rate of 12.2% for the past five years.
Cloudflare is a company that provides behind-the-scenes software that makes apps for phones, tablets and laptops work in a secure environment. And in a world that’s very focused on national security, Cloudflare is based in the U.S. for U.S. customers.
So, whether companies need secure internet domains or streaming service capabilities, Cloudflare is there to serve.
Revenue is on the way up with the trailing year, seeing gains of 49%. And this is part of a longer-term trend of sales gains that over the past five years has seen an average gain of 53.8% on a CAGR basis.
Source: Cloudflare Revenue — Source: Bloomberg
So far in my collection of cybersecurity stocks, outside of Cisco, there is a theme of sales growth with less focus on margins. That continues for Cloudflare. Operating margins are negative at 37.6%, resulting in a negative return on equity.
But the good news is that the company has little to no debt, with debt-assets running at 1.3%. And cash and cash equivalents are running at 820% of near-term liabilities over the next year.
Source: Cloudflare Total Return — Source: Bloomberg
The stock is newer to the public market, having come public in September 2019. But since then investors have seen a return of 138.3%.
Cybersecurity Stocks: Zscaler (ZS)
Zscaler is a company very focused on cybersecurity. It provides cloud-based internet security controls for both fixed and mobile devices. It is a gatekeeper for companies around the U.S., protecting customers from all of the usual threats and attacks.
Zscaler is one of the more respected cybersecurity stocks in the market. It has a good track record and a wide customer base.
Sales are up over the trailing year by 59.2%. And this is part of a longer-term proven record of sales gains. Over the past five years, revenue is up on average by 51.3% on a CAGR basis.
Source: Zscaler Revenue — Source: Bloomberg
While growth for growth’s sake is the history of the company, its negative margins are a whole lot more manageable. Operating margins are at a negative 11.7%, but again that still results in a negative return on equity.
But the company has no real debt, and cash and equivalents are running at 190% of current liabilities going out for a year.
Source: Zscaler Total Return — Source: Bloomberg
The stock has been working well for investors and traders. Since its IPO in 2018, it has returned 659%. So growth is good even without profits for now.
Check Point Software Technologies (CHKP)
Check Point Software Technologies is an information technology security company that is focused on corporate networks and internet service providers. The company provides verification and control products and services. And for service and internet providers, the company provides secure log-on and protection from various attacks including DDOS.
The company is a bit more of a slower grower. Over the past 10 years, quarterly revenue has been gaining on an average rate of 6.3% on a CAGR basis.
Source: Check Point Revenue — Source: Bloomberg
But the slower approach to sales growth comes with actual profitability. Operating margins are very good at 44.2%. And in turn, the company has a very positive return on shareholders’ equity at 22.9%.
The stock is reflective of the steady gains in revenue and the profitability of the company. The shares have returned 262.9% over the trailing 10 years.
Source: Check Point Total Return — Source: Bloomberg
There’s no dividend, but debt is near zero compared to assets. The company has ample cash and cash equivalents amounting to 150% of current liabilities. And the stock is a comparable value at only 8.9 times intrinsic value and 4.97 times trailing sales.
Cybersecurity Stocks: Palo Alto Networks (PANW)
Palo Alto Networks is another network security company with heavy-duty firewall products and services that limit hacks, DDOS attacks and data theft. Palo Alto started with fixed networks. Since then, it has expanded to mobile devices. It’s a go-to company during the ramp-up in remote working and stay-at-home conditions.
It focuses on quickly identifying approved and appropriate network users. Then, it also works to limit access per customer needs and wants. This means that customers can use it to customize who gets access to what, and when. This is increasingly important and provides the company with some competitive advantages.
Revenue is up by 27.5% over the trailing year. And the company has a similar history of ramping up revenues year after year, with the average for the trailing five years running at an increasing rate of 26.6% on a CAGR basis.
Source: Palo Alto Networks Revenue — Source: Bloomberg
The company is getting better on cost controls with operating margins now running at a lower rate of negative 1.9%. But this still results in a negative return on shareholders’ equity. Debt is lower at only 21.7% of assets and the company is in good shape with current cash and cash equivalents running at 180% of current liabilities.
The stock has delivered a pretty good return since its IPO of 472.6%.
Source: Palo Alto Networks Total Return — Source: Bloomberg
The stock is a comparable value for the sector group as it is valued at 7.10 times trailing sales.
A nibble on this stock as well as the others in my selection of cybersecurity stocks would provide good access to the mission-critical cybersecurity market that should continue to be firmly in demand.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.