5 Cybersecurity Stocks to Lock Up Growth
With a boost in global security spending expected this year, these five cybersecurity stocks could be worth a closer look.
It was a rough start to the year for growth stocks, which sold off sharply as bond yields spiked. But the intense selling has presented some compelling opportunities for investors that may be looking to buy on the dip.
Take cybersecurity stocks, for example, which pulled back drastically in the first quarter. The fact is, though, that online threats are becoming more frequent and more severe.
Just look at last year's SolarWinds (SWI) breach, where the computer systems of the U.S. government, foreign governments and over 16,000 private-sector companies were penetrated – allegedly at the hands of the Russian Foreign Intelligence Service (SVR). The SolarWinds hack lasted roughly nine months and involved the accessing of highly sensitive information, and it's still not clear just how extensive the breach was.
More broadly, a report from research firm Canalys notes 12 billion records were breached last year, while ransomware attacks spiked 60%.
The ongoing threats and risks with cybersecurity puts companies under increased pressure to guard against these threats, and in its 2021 global cybersecurity forecast, Canalys predicted cybersecurity spending will increase 10% this year worldwide to $60.2 billion.
So which cybersecurity stocks stand to benefit from this boost in spending? And which look attractive right now?
We've compiled a list of the five of the best cybersecurity stocks to buy as growth in the sector ramps up.
Data is as of April 23.
Okta
- Market value: $36.0 billion
Identity management is about securing logins for enterprise information technology (IT) systems. It's a massive business and it is continuing to grow at a healthy clip.
One of the leaders in the enterprise IT systems space is Okta (OKTA, $279.30). The company was founded in 2009, and it has been one of the beneficiaries of the megatrend in cloud computing. Okta has been aggressive in building a rich ecosystem with integrations in over 7,000 cloud, mobile and web applications.
And during the COVID-19 pandemic, there has been even more demand for the company's platform due to the need to secure remote workers.
In 2020, revenue jumped 43% to $835.4 million and operating cash flows came to $128.0 million, compared to $55.6 million in the year prior. Okta counts more than 10,000 customers that include small businesses and large enterprises, such as FedEx (FDX) and T-Mobile (TMUS).
In early March, Okta agreed to shell out $6.5 billion in stock to purchase Auth0 – a creator of technology that makes it easy for developers to implement identity management in their own applications. It's a strategy similar to fintech firm Stripe and cloud communications company Twilio (TWLO).
For Okta, the deal will help accelerate the penetration of the projected $55 billion market opportunity. In other words, there should be a considerable runway for growth for this cybersecurity stock in the years ahead.
BlackBerry
- Market value: $4.9 billion
BlackBerry (BB, $8.85) might seem like a technology has-been, but investors should not dismiss the former smartphone maker. Believe it or not, it actually has earned a place among more traditional cybersecurity stocks.
During its heyday in the late aughts as the leading smartphone developer, the company and its phones had many high-profile followers, including President Barack Obama and Kim Kardashian. But even when it was mostly focused on mobile devices, BlackBerry had an impressive set of security technologies for the enterprise.
BlackBerry stopped making its smartphones in 2016, and in more recent years, has been bulking up its security offerings with acquisitions – including buying U.K.-based cybersecurity consultancy Encription in early 2016 and artificial intelligence (AI) firm Cylance in 2018. The result is now a comprehensive platform that secures over 500 million endpoints within the Internet of Things, which includes 175 million cars on the road.
The core software for BlackBerry is Spark. It leverages sophisticated AI and machine learning (ML) systems to provide for “zero trust” security. Essentially, the system gets smarter and smarter as more data is processed. Spark is also delivered with a single agent for all endpoints and is administered via the cloud.
Another key solution is BlackBerry QNX. It is a real-time operating system and middleware for a handful of industries, including autos, industrial automation and medical systems.
Keep in mind that Amazon.com's (AMZN) AWS cloud business has entered an exclusive agreement with BlackBerry to use QNX to create a vehicle data service called IVY. This will capitalize AI to deliver insights to automakers. The system is expected to be released later this year and should be a nice source of growth for the cybersecurity stock.
Zscaler
- Market value: $25.3 billion
The traditional approach to security is to use firewalls to protect the corporate IT network in what is known as perimeter security.
But what if an employee is working remotely? Or what if an application is accessed via the cloud? In these situations, the firewall may fall short, and a security system needs to be in place that goes beyond the corporate network.
This is where Zscaler (ZS, $190.26) comes in. The company, which was founded in 2008, has built a platform that allows for protection regardless of the location of the computer or device. The Zscaler system is cloud-based, meaning there is no need to install security appliances.
Oh, and it has major scale. The system processes a whopping 7 billion policy enforcement and threat mitigations per day. And Zscaler has more than 5,000 customers using its technology, including 500 firms on the Forbes Global 2000 list.
Growth has certainly been robust. In its second quarter of fiscal 2021, revenue jumped 55% year-over-year to $157.0 million and cash flows were up almost 500% to $30.4 million.
Even with the hefty valuation – the market capitalization of Zscaler is more than $25 billion – Wall Street is still upbeat. Based on the TipRanks consensus price target of $236.75, analysts are expecting about 24% potential upside for the cybersecurity stock over the next 12 months or so.
Secureworks
- Market value: $1.1 billion
In 2016, Dell Technologies (DELL) spun off its security division Secureworks (SCWX, $13.51). The shares are currently flat compared to where they began trading at five years ago, but investors should not throw in the towel on this cybersecurity stock.
During the past couple years, Secureworks has made progress with developing its cloud-native security analytics system Taegis.
There are close to 400 customers using it and the annual recurring revenue (ARR) from the subscription-based service soared 266% in fiscal 2021 to $55 million.
As for the valuation, it is definitely attractive, at about two times sales. So if growth continues to ramp up for Taegis, this cybersecurity stock should start to get into gear, too.
Sumo Logic
- Market value: $1.9 billion
With the recent selloff in growth stocks, Sumo Logic (SUMO, $19.72) has seen its share price get cut in half since February. This does look like an overreaction, though, and the company appears poised for a promising long-term future.
Founded in 2010, Sumo Logic is the developer of continuous intelligence, which leverages the cloud to process huge amounts of data to detect threats in real-time. The system also provides analytics for deep investigations, not just surface-level metrics. And there are sophisticated modules to help with audits, compliance and regulations.
To bolster its security capabilities, Sumo Logic recently acquired DFLabs, which is a leader in cloud-native technologies for threat detection, incident response and forensic investigations. Terms of the deal were not released, but it is expected to close in the second quarter of fiscal 2022. There is a nice opportunity here to sell the technology across Sumo Logic's base, which includes over 2,100 customers.
Sumo Logic's technology has applications that go well beyond security, too. For example, its platform can help with IT operations, cloud management and even AI development. This is why the company's market opportunity is massive, at an estimated $55.1 billion, based on research from International Data Corporation.
Given this potential for growth, SUMO looks to be one of the best cybersecurity stocks to buy.
