You might think it’s a good time to get into cybersecurity stocks amid high-profile hacking incidents. Also, the buzz around artificial intelligence is fueling investor interest in cybersecurity stocks. Federal government spending on cybersecurity should provide a boost in 2024, analysts say.
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As of March 6, the IBD Computer Software-Security group was ranked 30th out of 197 industry groups tracked by IBD. It fell from number 9 a week ago.
Also, three cybersecurity stocks are members of the IBD 50 Growth Stocks list: CrowdStrike (CRWD), SentinelOne (S) i Cloudflare (NET).
Shares of CRWD surged on better-than-expected earnings and fourth-quarter outlook.
“The fourth quarter was the company’s fourth consecutive quarter with positive GAAP earnings, meaning CrowdStrike could potentially qualify for inclusion in the S&P 500,” Bank of America said in a report.
Zscaler (ZS), a major player in the fast-growing SASE market, has dropped from the IBD Leaderboard. Billings, a sales growth metric, is a problem for ZS stock amid market swings.
Is a cyber security price war brewing?
Palo Alto Networks‘ (PANW) fiscal second-quarter earnings report and reduced 2024 guidance for PANW stock sent the cybersecurity stock lower. Palo Alto’s decision to bundle more products in discounted bundles as part of its “Platformization” strategy could spark a price war, some investors worry.
At Jefferies, analyst Joseph Gallo said in a report: “PANW’s results will rattle the cyber complex given fears of corporate consumer fatigue.”
The Big Picture: Cybersecurity services delivered through cloud computing platforms are in favor. Many companies are moving away from “firewall” devices for local computer networks.
Raymond James analyst Adam Tindle predicted a fast-growing cloud security market in a recent report. “In 2024, we reach a total addressable cloud security market worth $16 billion, growing faster than a three-year compound annual growth rate of 20%, to reach $30 billion in 2027.”
The problem is that public cybersecurity companies are in a fierce battle with fierce cloud security startups for market share. Among the startups: Wiz, Lacework and Snyk.
Cybersecurity Stocks: Microsoft’s Competition
Cybersecurity stocks advanced despite growing competition from cloud computing giants Microsoft (MSFT). Microsoft aims to integrate artificial intelligence tools into its security platform. Called Microsoft Security Copilot, the platform uses a new AI assistant.
Recent hacks of casino operators MGM Resorts (MGM) and Caesars Entertainment (CZR) highlighted concerns that generative artificial intelligence 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 significant business impact.
Furthermore, research firm Gartner has updated its forecast of corporate cybersecurity spending. The research firm predicts 14% growth in 2024 to $215 billion.
This is higher than the previously forecasted growth of 11%. And that’s better than most IT spending categories.
In 2024, spending on security products and cloud services will jump nearly 25% to $7 billion, Gartner predicts.
Cybersecurity Stocks: AI’s Double-Edged Sword
Meanwhile, both computer security companies and hackers are expected to use generative AI tools. Here’s a look at the AI cybersecurity battle.
Cybersecurity companies expect generative AI tools to help reduce detection and response times to many forms of computer hacking. Also, they see generative artificial intelligence automating more functions in security operations centers to help companies deal with software engineer shortages.
According to Morgan Stanley’s survey of chief information officers in 2022, cloud computing and security software remained at the top of the priority list, followed by business intelligence/analytics, digital transformation and artificial intelligence.
Analysts say a new wave of startups is taking share from industry leaders. 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. Startups are putting pressure on existing companies to invest more in research and development.
Funding continues to go to cybersecurity startups. Cloud security company Wiz recently raised $300 million at a $10 billion valuation.
Cybersecurity Stocks and Private Equity
Private equity firms are still active. Thoma Bravo agreed to buy ForgeRock in October 2022 for $23.25 per 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 October 10. The deal is expected to close in the first half of 2023.
Previously, Thoma Bravo acquired Ping Identity Holdings (PING) for $2.8 billion. Thoma Bravo also acquired cybersecurity companies SailPoint Technology, Proofpoint, Sophos and Barracuda. The private equity firm has invested in cybersecurity startups, such as Illumio.
Also, private equity firm Permira completed the purchase of Mimecast for $5.8 billion in May.
Federal market tailwind?
Google-parent Alphabet ( GOOGL ) bought cybersecurity firm Mandiant in a $5.4 billion cash deal last year. Mandiant is now part of Google’s cloud business.
Furthermore, in 2022, Google acquired Siemplify, a provider of security orchestration, automation and response services, for about $500 million.
Still, some computer security companies could get a boost from new federal government initiatives.
The Cyber Incident Reporting Act of 2023 requires agencies, federal contractors and operators of critical infrastructure to notify the Department of Homeland Security when a data breach is discovered, a significant step in building security.
In addition, Ransomware remains a major threat.
Cyber Security Stocks: A Wide Range of Products
Furthermore, an investor needs to know which cybersecurity stocks deal with ransomware, identity theft, or other types of cyber attacks.
Meanwhile, CrowdStrike uses machine learning and a specialized database to detect malware on laptops, mobile phones and other devices accessing corporate networks. In addition, many software companies are using artificial intelligence to gain a competitive advantage.
In addition, Zscaler is the largest provider of cloud-based network security gateways that scan customer data traffic for malware.
SailPoint, a maker of identity management software, is one of the companies that collects more than 10% of its revenue from government agencies.
Other cybersecurity firms with large government operations include Sustainable (TENB), Rapid7 and CyberArk (CYBR). In 2021, Tenable acquired France-based Alsid, which focuses on identity access management.
In the Appendix, Rapid7 (RPD) and Qualys (QLYS) specializing in vulnerability management services.
Amid the rapid global spread of Covid-19, many companies have instructed employees to work from home. This has increased the demand for computer security products that support remote work.
The coronavirus emergency and the shift to remote work have accelerated the growth of cloud-based network security. So the industry now has a new term for the infrastructure that supports distributed workers and branches.
SD-WAN technology is changing security needs
Corporate America has increased spending on security technology to protect intellectual property as well as consumer privacy. Hackers continue to steal credit card information and intellectual property.
Spending on security technologies has evolved as companies shift business workloads to cloud computing service providers. Amazon Web Services, part Amazon.com (AMZN), is the largest cloud services company. Amazon looms as a potential rival to companies like Cloudflare as it builds more security tools into its cloud services.
Also, Fortinet (FTNT) competes with Palo Alto Networks and others in the firewall security market. Firewalls are located between private networks and the Internet. They block unauthorized traffic and scan web applications for malware.
As large companies shift to off-premises cloud computing services, one view is that firewall technology will play a smaller role. Fortinet targeted software-defined wide area networks, or SD-WANs, an emerging computer networking technology.
Cyber Security Products Fighting Ransomware, Identity Theft
Furthermore, cybersecurity stocks encompass a wide range of products and services. In addition, some security vendors are moving away from selling hardware devices to software-based subscription business models. Among them, Proofpoint specializes in protecting email and data from loss.
Meanwhile, hackers often seek to compromise networks by targeting employees or management who have administrative access. CyberArk (CYBK) manages privileged accounts. In addition, Okta provides identity verification services.
To slow down hackers, more companies are focusing on internal security threats through a strategy known as Zero Trust. In addition, traditional security measures aim to keep bad guys out of corporate networks. Furthermore, 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 companies verify the identity of network users and restrict access to applications.
CrowdStrike, Okta (OKTA), Netskope and Proofpoint recently formed the Zero Trust Alliance. Targeting Zero Trust security, Cisco Systems (CSCO) acquired Duo Security in 2018 for $2.35 billion.
Also, many fast-growing cybersecurity companies are in the endpoint market. Their tools detect malware on laptops, mobile phones and other devices accessing corporate networks.
Also, investors might consider Global X Cybersecurity ETF (BUG) for broader exposure to the sector.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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