You may think the time is right to move into cybersecurity stocks amid a flurry of high profile hacking incidents. Also, buzz surrounding artificial intelligence is driving investor interest in cybersecurity stocks. And, federal government spending on cybersecurity should provide a boost in 2024, analysts say.
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Cybersecurity Breaches Are A Concern For Executives. This Is ‘Critical’ As They Prepare.
As of July 29, the Computer Software-Security group ranked No. 166 out of 197 industry groups that IBD tracks, down from No. 75 six weeks earlier.
Further, Palo Alto Networks (PANW) has gained 13% in 2024. Palo Alto Networks has joined the IBD Breakout Stocks Index, which gets updated weekly.
Cyberattacks On The Rise In 2024
Check Point Software Technologies (CHKP) kicked off the second quarter earnings season for cybersecurity stocks, topping consensus estimates. In Q2 2024, Check Point Research saw a 30% year-over-year increase in cyber attacks globally as hackers targeted health care and other sectors.
Meanwhile, Fortinet (FTNT) reports Aug. 6.
William Blair analyst Jonathan Ho in a report said Q2 results may test the valuations of cybersecurity firms.
“We are not seeing a pause in spending from a shift in focus to AI impact cybersecurity budgets in a meaningful way,” Ho said. “Our broader concern is that valuations for cybersecurity companies have held up well in anticipation of the defensive nature of the spend. Secular growth opportunities that have outpaced other areas of software. As that valuation gap grows, we believe expectations maybe challenging to meet despite solid fundamentals.”
Meanwhile, CrowdStrike (CRWD) has dropped off the IBD 50 roster of growth stocks. CrowdStrike stock plunged in the wake of a widespread IT outage caused by the cybersecurity firm’s software update.
However, shares in Crowdstrike rival SentinelOne (S) have gained.
Also Google-parent Alphabet’s (GOOGL) talks to acquire well-funded startup Wiz fell apart. Wiz plans to focus on hitting $1 billion in annual recurring revenue and preparing for an eventual initial public offering. A Wiz IPO would likely be the biggest ever in cybersecurity.
Cloud Products Boost Cybersecurity Stocks
Some Wall Street analysts tout cybersecurity stocks with cloud-based platforms as the most likely market share gainers.
Palo Alto Networks has used acquisitions to build a cloud platform equipped with artificial intelligence tools. Many companies aim to consolidate purchasing by buying from fewer security vendors, analysts say.
Further, CrowdStrike and Palo Alto Networks are players in the cloud security market, which incudes Cloud Native Application Protection Platform (CNAPP) products and services.
Bank of America forecasts that the CNAPP market will grow from $7.2 billion in 2023 to $16.3 billion in 2027 — a 24% five-year compound annual growth rate.
“The CNAPP market is evolving rapidly and private companies (Wiz and Orca), once leading the space technologically, are seeing more established security vendors entering the space like Crowdstrike, Palo Alto Networks, Zscaler (ZS), Fortinet and others, all addressing it from different angles,” said a BofA report.
Market research firm IDC holds a similar outlook.
The cybersecurity market will grow double digits from 2023 to 2028, hitting $201 million in 2028, IDC forecasts. It predicts that the CNAPP will be the fastest growing product category over the five years.
Further, cybersecurity firms with the highest Composite Ratings include Palo Alto Networks and CyberArk (CYBR).
Cybersecurity Stocks: Microsoft Competition
The cybersecurity stocks have thrived despite growing competition from cloud computing giant Microsoft (MSFT). Microsoft aims to integrate artificial intelligence tools into its security platform. Called Microsoft Security Copilot, the platform uses a new AI assistant.
The recent hacks on UnitedHealth Group and casino operators MGM Resorts (MGM) and Caesars Entertainment (CZR) underlined worries that generative AI will increase ransomware attacks.
Meanwhile, the Securities and Exchange Commission has new disclosure rules for public companies. The rules require companies to report hacking incidents within four business days if they have a material impact on operations.
Cybersecurity Stocks: AI Double-Edged Sword
Meanwhile, both computer security firms and hackers are expected to make use of generative AI tools. Here’s a look at the AI cybersecurity battle.
Cybersecurity firms expect generative AI tools to help reduce the time to detect and respond to many forms of computer hacking. Also, they see generative AI automating more functions in security operations centers to help companies deal with a shortage of software engineers.
Analysts say a new wave of startups is taking share from industry incumbents. They include Netskope, Wiz, Snyk, Lacework and Illumio. Analysts say others to watch include Vectra AI, Venafi, Recorded Future, Noname Security, Obsidian Security, Deep Instinct and Skyflow. The startups pressure incumbents into higher research and development spending.
Funding continues to go to cybersecurity startups. Cloud security firm Wiz recently raised $300 million at a $10 billion valuation.
Cybersecurity Stocks And Private Equity
Private-equity firms remain active. Thoma Bravo in October 2022 agreed to buy ForgeRock for $23.25 a share in an all-cash deal valued at about $2.3 billion. The deal represented a 53% premium to ForgeRock’s closing share price on Oct. 10. The deal is expected to close in the first half of 2023.
Earlier, Thoma Bravo acquired Ping Identity Holdings (PING) for $2.8 billion. Thoma Bravo also has acquired cybersecurity firms SailPoint Technology, Proofpoint, Sophos and Barracuda. The private equity firm has invested in cybersecurity startups, such as Illumio.
Also, private-equity firm Permira in May completed its purchase of Mimecast for $5.8 billion.
Still, some computer security firms could get a boost from new federal government initiatives.
The Cyber Incident Reporting Act of 2023 requires agencies, federal contractors and critical infrastructure operators to notify the Department of Homeland Security when a data breach is detected, a significant step in building security.
In addition, Ransomware remains a big threat.
Cybersecurity Stocks: Wide Range Of Products
Further, it behooves an investor to know which cybersecurity stocks address ransomware, phishing or other kinds of cyberattacks.
Also, Fortinet competes with Palo Alto Networks and others in the firewall security market. Firewalls reside between private networks and the internet. They block unauthorized traffic and check web applications for malware.
As large companies shift to off-premise cloud computing services, one view is that firewall technology will play a lesser role. Fortinet has targeted software-defined wide area networks, or SD-WANs, an emerging computer networking technology.
Also, many fast-growing cybersecurity firms are in the endpoint market. Their tools detect malware on laptops, mobile phones and other devices that access corporate networks.
In addition, Zscaler is the biggest provider of cloud-based web security gateways that inspect customers’ data traffic for malware.
In addition, Rapid7 (RPD) and Qualys (QLYS) specialize in vulnerability management services.
Zero Trust Gains Momentum
Meanwhile, hackers often aim to compromise networks by targeting employees or management who have administrative access. CyberArk manages privileged accounts. In addition, Okta provides identity verification services.
To slow down hackers, more companies are focusing on internal security threats though a strategy known as Zero Trust. In addition, traditional security measures aim to keep the bad guys out of corporate networks. Further, network firewalls focus on intruders from the public internet.
Zero Trust cybersecurity models focus on internal threats, such as hackers stealing someone’s security credentials. Security firms verify the identity of network users and limit access to applications.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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