Editor’s note: This story was previously published in April 2019. It has since been updated and republished.
Cybersecurity stocks have been among the best stocks in the market in recent years. The ETFMG Prime Cyber Security ETF (NYSEARCA:HACK) has gained 69% in the past three years, easily outperforming the broader market.
There are plenty of reasons to believe that outperformance will continue. After all, high-profile data breaches continue to occur. This week, for instance, TechCrunch reported that privately held Arizona Beverages was the victim of a crippling ransomware attack. The incident is yet another lesson that companies cannot cut corners when it comes to security protection.
To be sure, investors are aware of the trend. Cybersecurity stocks aren’t cheap. But for investors willing to pay up, the sector is large enough to offer a variety of options. These five cybersecurity stocks offer different bull cases for different types of investors.
Palo Alto Networks (PANW)
Palo Alto Networks (NYSE:PANW) might be the simplest, “set it and forget it”, play among cybersecurity stocks.
Palo Alto has successfully transitioned away from a reliance on hardware and jumpstarted growth in the process. Revenue in the third quarter, for instance, rose over 24% year-over-year, crushing analyst estimates.
At the moment, Palo Alto is the largest cybersecurity play … and the most diversified. If the market as a whole continues to grow, Palo Alto Networks should benefit.
That said, there are concerns, as I wrote after earnings. PANW stock isn’t cheap. And we’ve seen the cloud story break down elsewhere as spending has slowed. PANW is the biggest stock in the space, and it has the simplest bull case. It’s going to rise if its market keeps growing. But at this point, it may be one of the better cybersecurity stocks, but not necessarily one of the best stocks in the space.
As noted earlier, cybersecurity stocks aren’t cheap, and value plays are hard to find. Symantec (NASDAQ:SYMC) might be the cheapest stock in the space, but there are reasons.
Growth has stalled out. Fiscal 2019 guidance, which disappointed and then was pulled further down, suggests a year-over-year decline in revenue and earnings. An accounting investigation has only added to the pressure on SYMC stock. A continuing reliance on PC-related revenue makes the stock less exposed to growth on the enterprise side of the industry.
That said, SYMC has a path to upside. Private equity firm Thoma Bravo has reportedly considered acquiring the company. Symantec itself is making acquisitions to build out its enterprise business, acquiring Israeli cloud security provider Luminate Security in February.
And the stock is cheap, at 13x next year’s earnings-per-share estimates. If Symantec can continue to build out its enterprise business, that valuation might be far too low.
Secureworks (NASDAQ:SCWX) is one of the best stocks in the sector for traders. Secureworks focuses on software-driven solutions, predominantly through a SaaS (software-as-a-service) model.
And SCWX stock might be in play. Dell Technologies (NASDAQ:DELL) owns 86% of the company and is looking to pay down debt. Reuters reported in February that Dell was considering a sale, which might make some sense. Secureworks isn’t as material to the Dell business as VMWare (NYSE:VMW) and it might perform better as an independent company or as part of a larger security provider.
Meanwhile, SCWX stock has pulled back of late and it looks cheap enough to garner some interest. Profits are still miniscule, but revenue is growing — and an acquirer might be willing to pay a premium to the current sub-3x price-to-sales multiple. SCWX’s opportunity is solid enough on its own long-term, but there’s a decent chance a buyout offer could spike SCWX stock in 2019.
For investors who like chasing growth, the cybersecurity sector has some of the best stocks. One of them is Proofpoint (NASDAQ:PFPT).
Proofpoint continues to post huge increases in revenue and profits, with sales up 35% in Q4. As a result, PFPT has rallied strongly, gaining 47% already in 2019.
At current levels, PFPT is challenging all-time highs. And it’s not cheap, at 9x revenue and 55x forward EPS estimates. But there’s room for upside from a technical perspective if the stock can bust through resistance. And there’s room for upside from a fundamental perspective too … if its current growth continues.
For investors who appreciate business transformations, meanwhile, Carbonite (NASDAQ:CARB) might be the play.
Carbonite started as a largely consumer-focused company. But it has expanded into small and medium businesses with help from an aggressive M&A strategy.
That strategy continued this year, with the recently closed $619 million acquisition of Webroot. Yet even with those deals driving growth, CARB looks reasonably cheap. Pro forma for the Webroot purchase, the stock trades at 11-12x 2019 EBITDA guidance. Looking to 2020, analysts see well over $2 per share in EPS.
With a sharp pullback of late, that suggests just an 11x forward EPS multiple. That might be far too cheap — particularly if the strategy here is on point. While larger rivals chase larger deals, Carbonite might be able to create value by chasing smaller fish.
As of this writing, Vince Martin was long shares of Dell Technologies.
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