You may think it’s a good time to invest in cybersecurity stocks because of the high-profile hacking incidents. Also, the buzz around artificial intelligence is driving investor interest in cybersecurity stocks. And federal spending on cybersecurity should get a boost in 2024, analysts say.
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Cybersecurity breaches are a concern for executives. This is ‘critical’ to their preparation.
As of July 1, the Computer Software-Security Group ranked 57 out of 197 industry groups tracked by IBD. Cybersecurity stocks posted mixed earnings results for the March/April quarters.
Meanwhile shares in CrowdStrike (CRWD) are up 50% this year. But CRWD stock is trading above a 5% buy zone. CrowdStrike shares joined the S&P 500 index in June.
Cloud products boost cybersecurity stocks
Further CrowdStrike and Palo Alto Networks (PANW) is a player in the cloud security market, which also includes CNAPP (Cloud Native Application Protection Platform) products.
Bank of America predicts the CNAPP market will grow from $7.2 billion in 2023 to $16.3 billion in 2027 – a compound annual growth rate of 24% over five years.
“The CNAPP market is evolving rapidly and private companies (Wiz and Orca), which were once technology leaders in the sector, are increasingly seeing established security vendors enter the market, such as Crowdstrike, Palo Alto Networks, Zscaler (ZS-), Fortune (FTNT) and others, all approaching the problem from a different angle,” a BofA report said.
Market research firm IDC has a similar view.
The cybersecurity market will grow by double digits from 2023 to 2028, reaching $201 million in 2028, IDC predicts. It predicts that the CNAPP will be the fastest-growing product category over the next five years.
Industry consolidation continues. Fortinet acquired Lacework, a cloud security company, in June.
Some Wall Street analysts are touting cybersecurity stocks with cloud-based platforms as the most likely market share winners. Many companies are looking to consolidate their purchases by buying from fewer security vendors, analysts say.
Additionally, the cybersecurity companies with the highest composite ratings include CrowdStrike stock, Palo Alto Networks and CyberArk (CYBR technology).
Cybersecurity Stocks: Mixed Earnings Reports
CRWD stock’s first-quarter earnings beat expectations.
Among cybersecurity stocks, Palo Alto Networks reported a fiscal third-quarter loss that missed Wall Street targets. PANW shares are up 15% for 2024.
Shares of Fortinet also fell after first-quarter billing growth missed estimates. Shares in Cloudflare (NET) fell on weak revenue prospects. NET shares are down a fraction in 2024.
Meanwhile, Cloudflare stock has disappeared from the IBD 50 list of growth stocks.
The big picture: Cybersecurity services delivered via cloud computing platforms are in demand, with many companies moving away from on-premise computer network “firewall” devices.
Cybersecurity Stocks: Microsoft Competition
Cybersecurity stocks thrived despite increasing competition from the cloud computing giant Microsoft (MSFT). Microsoft is looking to integrate artificial intelligence tools into its security platform. The platform, called Microsoft Security Copilot, uses a new AI assistant.
With the acquisition of Mandiant, Google’s parent company has Alphabet (GOOGL) is also making a big cybersecurity push. Mandiant is partnering with software maker Snowflake (SNOW), where a hacking incident occurred.
On June 20, the Department of Commerce’s Bureau of Industry and Security announced a final rule banning cybersecurity software vendor Kaspersky from providing antivirus software and security products or services in the U.S.
The US ban would hit CrowdStrike, Microsoft and SentinelOne (S), analysts say.
The recent hacks at UnitedHealth Group and casino operators MGM Resorts (MGM) and Caesars Entertainment (CZR) highlighted concerns that generative AI will increase the number of ransomware attacks.
Meanwhile, the Securities and Exchange Commission has new disclosure rules for publicly traded companies. The rules require companies to report hacking incidents within four business days if they have a material impact on their business.
Cybersecurity Stocks: AI Double-Edged Sword
Meanwhile, both computer security companies and hackers are expected to make use of generative AI tools. Here’s a look at the AI cybersecurity battle.
Cybersecurity companies expect generative AI tools to reduce the time to detect and respond to many forms of computer hacking. They also expect generative AI to automate more functions in security operations centers to help companies deal with a shortage of software engineers.
Analysts say a new wave of startups are taking market share from established companies in the industry. These 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. The startups are putting pressure on established companies to spend more on research and development.
Funding continues to flow into cybersecurity startups. Cloud security company Wiz recently raised $300 million at a $10 billion valuation.
Cybersecurity stocks and private equity
Private equity firms remain active. Thoma Bravo agreed in October 2022 to purchase ForgeRock for $23.25 per share in an all-cash deal valued at approximately $2.3 billion. The deal represented a 53% premium to ForgeRock’s closing price on Oct. 10. The deal is expected to close in the first half of 2023.
Earlier, Thoma Bravo took over the company Ping Identity Holdings (PING) for $2.8 billion. Thoma Bravo has also acquired cybersecurity companies SailPoint Technology, Proofpoint, Sophos and Barracuda. The private equity firm has invested in cybersecurity startups such as Illumio.
Private equity firm Permira also completed its purchase of Mimecast in May for $5.8 billion.
Federal market a tailwind?
Additionally, in 2022, Google acquired Siemplify, a security orchestration, automation, and response provider, for approximately $500 million.
Still, some computer security companies could benefit from new federal government initiatives.
The Cyber Incident Reporting Act of 2023 requires agencies, federal contractors, and critical infrastructure operators to notify the Department of Homeland Security when a data breach is detected. This is an important step in building security.
In addition, ransomware remains a major threat.
Cybersecurity Stocks: Wide Range of Products
In addition, it is important for investors to know which cybersecurity stocks offer protection against ransomware, phishing or other forms of cyber attacks.
CrowdStrike uses machine learning and a specialized database to detect malware on laptops, mobile phones and other devices that connect to corporate networks.
In addition, many software companies are leveraging artificial intelligence to gain a competitive advantage.
Additionally, Zscaler is the largest provider of cloud-based web security gateways that monitor customer traffic for malware.
Other cybersecurity companies with significant government activity include: Durable (TENB), Rapid7 and CyberArk. Tenable acquired France-based Alsid in 2021, which focuses on identity access management.
In addition, Fast7 (RPD) and Qualys (QLYS) specializes in vulnerability management services.
Amid the rapid global spread of Covid-19, many companies have instructed their employees to work from home. This has increased the demand for computer security products that support remote working.
The coronavirus emergency and the shift to remote work have accelerated the growth of cloud-based network security. The industry now has a new term for the infrastructure that supports distributed employees and locations.
SD-WAN technology changes security needs
Corporate America has increased tech spending on security to protect intellectual property and consumer privacy. Hackers continue to steal credit card information and intellectual property.
Spending on security technologies has evolved as companies move their workloads to cloud computing service providers. Amazon Web Services, part of Amazon.nl (AMZN), is the largest cloud services company. Amazon is emerging as a potential rival to companies like Cloudflare as it builds more security tools into its cloud services.
Fortinet also competes with Palo Alto Networks and others in the firewall security market. Firewalls sit between private networks and the Internet. They block unauthorized traffic and check Web applications for malware.
As large enterprises move to off-premise cloud computing services, one view is that firewall technology will play a smaller role. Fortinet has focused on software-defined wide area networks, or SD-WANs, an emerging computer networking technology.
Cybersecurity products combat ransomware and phishing
In addition, cybersecurity stocks cover a wide range of products and services.
There are also many fast-growing cybersecurity companies active in the endpoint market. Their tools detect malware on laptops, mobile phones and other devices that access corporate networks.
Meanwhile, hackers often try to compromise networks by targeting employees or management who have administrative access. CyberArk manages privileged accounts. In addition, Okta offers identity verification services.
To slow hackers, more companies are focusing on internal security threats through a strategy known as Zero Trust. In addition, traditional security measures are aimed at keeping the bad guys out of corporate networks. And network firewalls target 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.
Investors may also consider the following options: Global X Cybersecurity ETF (BUG) for broader awareness of the sector.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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