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4 Stocks to Watch From the Prospering Security Industry

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The Zacks Security industry is benefiting from solid demand for cybersecurity offerings as well as the heightening need for secure networks and cloud-based applications amid growing hybrid working trends. Companies in this space are benefiting from the rising demand for IT security solutions owing to a surge in the number of data breaches. Increasing requirements for privileged access security on the back of digital transformation and cloud migration strategies are also fueling the demand for cybersecurity solutions.

Industry participants like Palo Alto Networks, Inc. (PANW - Free Report) , Fortinet, Inc. (FTNT - Free Report) , Check Point Software Technologies Ltd. (CHKP - Free Report) and Absolute Software Corporation (ABST - Free Report) are gaining from the aforementioned trends. However, the industry’s near-term growth prospects are likely to be hurt as organizations push back their investments in big and expensive technology products on growing global slowdown concerns amid the current macroeconomic challenges and geopolitical tensions. Supply-chain disruptions, component shortages, product cost inflation and a tight labor market are some of the headwinds that players in the space have been encountering lately. These, along with elevated operating expenses related to hiring employees and sales and marketing strategies to capture more market share, are likely to strain margins in the near term.

Industry Description

The Zacks Security industry comprises companies offering on-premise and cloud-based security solutions. The solutions can be used for identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, to name a few. Industry participants offer different types of security solutions, most of which can be used interchangeably.  These solutions can be roughly categorized into three types — Computer Security, Cybersecurity and Information Security. Computer Security solutions provide protection from vulnerabilities in both the software and hardware of a computer system. Cybersecurity includes sections like web security, network security, application security, container security and information security. Information Security is concerned with any form of data-security issue, be it physical or digital data.

4 Trends Likely to Influence the Future of the Security Industry

Rising Cyber Threats Boost Demand for IT Security: Frequent cyberattacks are spurring demand for security solutions. This trend has not only affected certain companies but also threatened the national security of some countries. Notably, the prevailing global health crisis has given rise to newer forms of hacking and cybercrimes, which are difficult for firms and individuals to deal with. The firms operating in the security industry are working hard to address these concerns. These companies are positioned to benefit as protection against spear phishing, credential-based attack, account takeover and ransomware attacks, among others, has become the need of the hour.

Accelerated Digital Transformation Aiding Growth: Increasing requirement for privileged access security on the back of digital transformation and cloud migration strategies is fueling the demand for cybersecurity solutions. The COVID-19 pandemic has further increased cyber onslaughts as businesses of all sizes are transitioning their operations to various online platforms. From education to entertainment, working to shopping, and even healthcare has gone virtual, causing high technology percolation in everyday lives. This has put not only businesses but also schools, hospitals and other organizations at the risk of online assaults. While public institutions and large companies have always been the target of hackers, smaller organizations with lower security standards are also on their radars. Further, the advent of 5G will enable other devices to connect to the Internet, thereby expanding the scope of Internet of Things (IoT) and artificial intelligence (AI). While IoT and AI will simplify things, these will also aggravate the rate of cybercrime, given the increased reliance on technology.

Macroeconomic Headwinds Might Hurt IT Spending: Enterprises may postpone their large IT spending plans due to a weakening global economy amid ongoing macroeconomic and geopolitical issues. In July 2022, Gartner lowered its forecast for worldwide IT spending growth rate to 3% from 4% mentioned earlier. The research firm’s report highlights that 2022 IT spending growth will be much slower than 2021 due to spending cutbacks across devices, software, IT services and communication services areas. This is likely to negatively impact the demand for IT security solutions in the near term.

Elevated Operating Expenses to Hurt Profitability: To survive in the highly competitive IT security market, each player is continuously investing in broadening its capabilities. The players in the space are aggressively investing in research and development to enhance their product portfolio and enhance their capabilities to provide a complete security solution to clients. Moreover, companies are investing heavily to enhance their sales and marketing capabilities, particularly by increasing their sales force. Therefore, elevated operating expenses to capture more market share are likely to dent margins in the near term.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #73, which places it among the top 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Before we present a few stocks that you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Security industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.

The industry has declined 4.8% during this period compared with the S&P 500’s 14.3% decline and the broader sector’s 31.3% depreciation.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing price-to-sales ratio (P/S), which is a commonly-used multiple for valuing Security stocks, the industry is currently trading at 14.98, higher than the S&P 500’s 3.60 and the sector’s 4.11.

Over the last five years, the industry has traded as high as 22.40X, as low as 10.00X and recorded a median of 14.98X, as the charts below show.

Price-to-Sales Ratio (Industry Vs. S&P 500)

Price-to-Sales Ratio (Industry Vs. Sector)

4 Stocks to Watch

Absolute Software: It is engaged in the business of providing firmware-persistent endpoint security and management solutions. The company provides solutions for computer security monitoring and endpoint management industry. Absolute Software currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Absolute Software is benefiting from the rising demand for cyber-security solutions owing to a slew of data breaches and a rise in demand for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud migration strategies adopted by organizations are key growth drivers. Synergies from last year’s NetMotion acquisition have enhanced its product portfolio, helping it gain new customers.

The consensus mark for Absolute Software’s fiscal 2023 earnings has been revised upward to 47 cents per share from 8 cents over the past 30 days. Shares of ABST have declined 8.6% over the past year.

Price Performance: ABST

Fortinet: This Zacks Rank #2 (Buy) company is a provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide.

Fortinet is benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network (SD-WAN) offerings. Moreover, continued deal wins, especially those of high value, act as key drivers. Higher IT spending on cybersecurity is further expected to aid Fortinet in growing faster than the security market. Also, FTNT’s focus on enhancing its UTM portfolio through product development and acquisitions is a tailwind.

The consensus mark for Fortinet’s 2022 earnings has been revised upward by a penny to $1.05 per share over the past 30 days. Shares of FTNT have plunged 18.4% over the past year.

Price and Consensus: FTNT

Palo Alto Networks: The company offers network security solutions to enterprises, service providers and government entities worldwide. Palo Alto Networks has been benefiting from continuous deal wins and increasing adoption of the company’s next-generation security platforms, attributable to the rise in the remote work environment and the need for stronger security.

Strong demand for form factor hardware products, particularly the recently launched machine learning (ML)-powered models that ensure zero-trust network security for organizations, is expected to contribute to Palo Alto Networks’ performance in the quarter’s ahead.

Growing traction in Strata, Prisma and Cortex offerings are acting as a tailwind. The acquisition of Bridgecrew earlier this year has enhanced the capabilities of Prisma and Cortex product capabilities, thereby helping Palo Alto Networks in attracting more customers.

Currently, Palo Alto Networks carries a Zacks Rank #3 (Hold).

The consensus mark for fiscal Palo Alto Networks’ 2022 earnings has been revised upward by 17 cents to $9.44 per share over the past 30 days. Shares of PANW have rallied 16% over the past year.

Price and Consensus: PANW

Check Point Software Technologies: This Zacks Rank #3 company has evolved into a well-known provider of IT security solutions across the world. The company offers a comprehensive range of software and combined hardware and software products aimed at IT security.

Check Point Software Technologies is benefiting from growth in security subscriptions, aided by strong demand for its advanced solutions, primarily CloudGuard, Harmony, Sandblast Zero-day threat prevention and Infinity solutions. Increased demand for network security gateways to support higher capacities is aiding the adoption of the company’s remote access VPN solutions.

Several Infinity deals in various industries, including government, telecommunication and industrial, are positives. Acquisitions have helped it to broaden its portfolio and enter newer markets, which have eventually driven its revenues. The company continues to win new customer accounts, which is boosting revenues.

The Zacks Consensus Estimate for 2022 earnings has remained unchanged at $7.24 per share over the past 60 days. Check Point Software Technologies’ shares have fallen 3.2% in the past year.

Price and Consensus: CHKP

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