How to invest in cybersecurity.
The digital transformation of the business world means a massive amount of valuable information has been digitized. More than 1.7 billion records were leaked online in the January 2019 alone, including an Oklahoma government breach that exposed seven years' worth of FBI investigations. A study by IBM Corp. (ticker: IBM) and Ponemon Institute found that the average worldwide data breach costs an organization $3.6 million, up 6.4% from a year ago. As costly as cybersecurity breaches have become, cybersecurity is now a major investment opportunity. Here are nine stocks cybersecurity stock picks from Bank of America.
Check Point Software Technologies (CHKP)
Check Point provides software, hardware and subscription IT solutions and focuses on simplifying cybersecurity. After a hot start to the year, the stock has lagged in recent months due to lackluster 4% revenue growth in the first quarter. Analyst Tal Liani says tepid revenue growth coupled with a 5% drop in product sales was a disappointment, but Check Point is offering new products, transitioning more to cloud security and has a stable 60% free cash flow margin. Bank of America has a "buy" rating and $130 price target for CHKP stock.
CyberArk Software (CYBR)
CyberArk specializes in securing organizations' privileged accounts, including keys to databases, industrial control systems, servers and applications. Analyst Daniel Bartus recently hosted a meeting with CyberArk management. The company says the privileged access management (PAM) market is growing at nearly a 20% annual rate and it has only 25% PAM penetration among its current customer base. Bartus says CyberArk has the opportunity to add customers and gain additional market share this year while growing revenue at a 20% clip. Bank of America has a "buy" rating and $145 price target for CYBR stock.
FireEye provides network security solutions for advanced persistent threats that are beyond the capabilities of traditional cybersecurity approaches like firewalls and anti-virus software. In May, FireEye acquired security testing vendor Verodin for $250 million, and Liani says the platform will help FireEye simulate attacks and fill in holes in enterprise architecture. With the stock down more than 50% in the past five years, Liani says it offers investors a rare combination of low expectations, low valuation and potential for long-term growth. Bank of America has a "buy" rating and $20 price target for FEYE stock.
ForeScout Technologies (FSCT)
ForeScout is a pure play on the high-growth field of network access control. Liani says ForeScout has plenty of growth drivers ahead in the next couple of years, including new products SilentDefense and EyeSegment. In the most recent quarter, ForeScout reported 26.6% revenue growth and 1.6 million new devices under management. Liani says the proliferation of the internet of things will drive a corporate spending shift toward NAC solutions, and ForeScout's leading market position makes it a unique investment opportunity. Bank of America has a "buy" rating and $50 price target for FSCT stock.
Palo Alto Networks (PANW)
Palo Alto Networks specializes in next-generation firewalls that provide network security. Palo Alto has been on an acquisition spending spree, including a $560 million deal for Demisto, a $410 million deal for Twistlock and a buyout of PureSec for an undisclosed amount. Liani likes Palo Alto's Prisma cloud security strategy, which already has more than 9,000 customers and an annual billings run-rate of more than $250 million. Liani says a customer refresh cycle could drive 20% revenue growth for the foreseeable future. Bank of America has a "buy" rating and $307 price target for PANW stock.
Mimecast primarily targets small and medium-sized businesses with its email security, continuity and archiving software solutions. Mimecast's most recent earnings report and guidance were a mixed bag, but Bartus says customer additions, average order value and billings growth are all trending in the right direction. Barus says Mimecast is a market leader in the high-growth software-as-a-service email security business. Mimecast is gaining core market share, adding new revenue-generating services and successfully upselling its existing customers to grow revenue. Bank of America has a "buy" rating and $60 price target for MIME stock.
Proofpoint specializes in email security, archiving, continuity and social media security. Bartus says Proofpoint's most recent quarter was mixed. Billings guidance was on the soft side and implies significant growth deceleration. However, new products are gaining traction in the market, and Proofpoint has significant bundling opportunities as well. Bartus says Proofpoint is the gold standard of email security and should continue to gain market share in this critical business. He says the international market is a key long-term growth source for Proofpoint. Bank of America has a "buy" rating and $155 price target for PFPT stock.
Splunk provides a platform for collecting, storing and analyzing machine-generated data. Analyst Kash Rangan says IT operations, security and compliance and business intelligence are three potential applications of Splunk technology that represent a $28 billion opportunity. Rangan says Splunk's 54% software revenue growth last quarter was particularly impressive, and the company could reach $3 billion in revenues by fiscal 2021. Splunk is a solution for companies facing the challenge of optimizing machine-generated big data as the internet of things grows. Bank of America has a "buy" rating and $167 price target for SPLK stock.
VMWare is a cloud computing and virtualization software and services company. Rangan says newer and fast-growing products now represent about 60 percent of VMWare's license revenue, suggesting sustainable double-digit revenue growth. As VMWare has become more strategic in landing larger and longer-dated deals, free cash flow margins have expanded from 23% in fiscal 2015 to 38% in fiscal 2018. Rangan estimates VMWare can reach $15 billion in annual revenue by fiscal 2023, 60% of which will be recurring. Bank of America has a "buy" rating and $225 price target for VMW stock.
The best cybersecurity stocks to buy:
-- Check Point Software Technologies (CHKP)
-- CyberArk Software (CYBR)
-- FireEye (FEYE)
-- ForeScout Technologies (FSCT)
-- Palo Alto Networks (PANW)
-- Mimecast (MIME)
-- Proofpoint (PFPT)
-- Splunk (SPLK)
-- VMWare (VMW)
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