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The 10 Biggest Cybersecurity Stocks – Yahoo Finance

Cybersecurity is one of the fastest-growing segments of the technology industry. As more people around the globe connect to the internet and hundreds of millions of devices get connected to a network every year, the need to keep all of that data secure is on the rise.

In fact, according to research firm Global Market Insights, cybersecurity is expected to go from a $120 billion-a-year endeavor in 2017 to more than $300 billion in 2024, good for an average 12% annual growth rate. It’s no wonder, then, that so many businesses are getting in on the movement. Old tech titans like Microsoft (NASDAQ: MSFT), Cisco (NASDAQ: CSCO), and Oracle (NYSE: ORCL) all offer cybersecurity as part of their service suites. Other names are investing in the action, too. Old smartphone maker BlackBerry (NYSE: BB), for example, bought small cybersecurity outfit Cylance in early 2019 to further its transformation as a software company.

Image source: Getty Images.

As the world goes digital, managing new digital-first business operations and keeping information safe and secure will continue to evolve and grow in importance. For those wanting to invest in the cybersecurity industry, researching the biggest names in the business is a good place to get started (after brushing up on the basics here). Here are the 10 largest companies that make cybersecurity their primary concern based on market capitalization (the value of the company calculated by number of shares outstanding multiplied by price per share).

Data as of July 23, 2019. Data source: YCharts and company-specific investor relations.

“Cybersecurity” is the umbrella term, but there are different types of security firms tackling various problems in today’s connected age.

For example, the larger outfits have been angling themselves to cover a wide range of needs, becoming one-stop security shops. Palo Alto Networks and Fortinet are two such companies, covering everything from firewalls (a network feature, sometimes a piece of hardware but more often software, that decides what data to let in and out) to artificial intelligence-based software that automates tasks and monitors an organization’s digital activity.

These companies focus on securing remote devices connected to a network. The number of devices hooked up to the internet has been growing by the hundreds of millions every year, and that trend is expected to continue. Businesses are leading the charge, and everything from employee smartphones and tablets to assets in transit to connected machinery is in need of safekeeping. Endpoint protection software handles that specific need. Startup CrowdStrike, among others, is a specialist in this space.

These niche companies include Okta, which provides privileged-access management — basically, only allowing users access to the sensitive data that they’re supposed to see. Then there’s security for the cloud, or computing and software that is offered remotely by way of a data center. Zscaler concerns itself with keeping cloud connections and data safe for businesses and organizations.

Regardless of the security need, digital-based operations and communications are on the rise across the board, which means all of the top cybersecurity companies are experiencing growth of some sort. That creates an opportunity for investors to cash in on the movement. Here is a breakdown of each of the top cybersecurity companies and how their stocks are valued.

The top 10 biggest cybersecurity stocks

1. Palo Alto Networks: The largest cybersecurity stock

Sitting atop the cybersecurity pure-play list is Palo Alto Networks. The company has built itself into the leader in the security space, offering a broad range of services for its customers from firewalls to automated threat response to cloud security. The largest player in the cybersecurity niche by market cap, Palo Alto has managed to outpace the industry’s average growth rate in spite of its size.

Part of the story behind Palo Alto’s growth is the company’s acquisition spree of smaller competitors. In May 2019, the company announced its intent to purchase two cloud-based cybersecurity outfits, one for $410 million and the other for a smaller undisclosed sum. Both were added to a new cloud security service segment called Prisma, aimed at continuously updating Palo Alto’s offerings as needs of customers evolve over time. CEO Nikesh Arora, a former executive at Alphabet‘s (NASDAQ: GOOGL) (NASDAQ: GOOG) Google, has indicated that strategic acquisitions will continue to play an integral part in his company’s strategy to remain relevant.

The sums of money paid for acquisitions have been substantial (at least $1 billion spent since 2018), and they’re among the reasons Palo Alto is not yet a profitable business. However, when backing out one-time nonrecurring expenses and noncash items, the company still manages to post positive free cash flow (money left over after basic operating expenses and capital expenditures). In short, that means the company can afford its aggressive buying spree.

The free cash flow generation is important, because it gives the leader in pure-play network security the wiggle room it needs to invest heavily in cloud computing, AI, and other technology as customer needs change over time. Global cloud spending is expected to grow an average of about 16% a year through 2022, according to technology research group Gartner. Sitting at the intersection of two double-digit growth industries, that long-term trend should give Palo Alto Networks an enduring outlet to sustain double-digit sales growth and help it maintain its pole position within the world of cybersecurity.

2. Splunk: Big data and securing business operations

Splunk started out as a big data monitoring company. Its software suite allows organizations to analyze and make sense of information being generated from their digital systems, from websites to connected equipment to payment processing networks, among other things. If it’s an electronic system, it creates data; and if it creates data, Splunk can help monitor it and give customers the ability to make sense of trends and other behavior of digital systems. Incidentally, one of the primary use cases for the data parsing and analytics platform is cybersecurity.

To increase its capabilities in that department, Splunk has also embarked on an aggressive acquisition spree. As a result, the big data company is now a leader in the fast-growing security orchestration, automation, and response (SOAR) segment of the cybersecurity industry. SOAR utilizes artificial intelligence (a software system that mimics how the human brain works and learns and adapts to changing circumstances) to sift through information in real time, detect potential threats, and take action to keep things on lockdown. With data breaches a constant threat, the ability to automate aspects of the workload holds appeal for large organizations.

Despite its size, Splunk has still been growing quickly. The downside is that Splunk is spending lots of cash to foster further expansion, which keeps the company in the red. Specifically, research and development of new software capabilities and sales and marketing to acquire new customers are the biggest line items affecting the bottom line. However, much like Palo Alto Networks, Splunk is free cash flow positive; profits will be a bigger consideration later on as the company matures.

That’s because Splunk’s primary industry, big data analytics, should grow an average of 13% a year and surpass $274 billion in size by 2023 — according to researcher IDC. Along the way, Splunk will also benefit from the booming and fast-changing cybersecurity industry, making it one of the best plays on the trend. The company’s expertise in monitoring and making sense of large and complex sets of data particularly lends itself to keeping business information locked up, and its recent takeovers of smaller peers have helped bolster its position in network security. Splunk’s prospects and chances at continued industry leadership look especially good.

3. Check Point Software: Adjusting to a new technology

Check Point Software, as its name implies, offers software security along with hardware to keep business networks secure. Much like Palo Alto Networks, the company has a diversified mix of solutions covering on-premeses computer networks, cloud, and endpoint protection.

Though it’s one of the largest and oldest cybersecurity companies around (founded in 1993), Check Point has not been growing at the breakneck speed of some of its peers. Low-single-digit sales growth has been the norm for some time. The reason? New technologies like the cloud have made some of Check Point’s legacy services like hardware-based security less compelling. The company is trailing some of its competitors, so spending to update the business model for today’s security needs has been a top priority. It isn’t paying off yet, and Check Point’s sluggish pace could mean its younger peers will bypass it in the years ahead.

There is one thing that makes Check Point different from other companies on this list, though. As an older, well-established company, it does turn a profit. Thus, traditional valuation metrics (without the need to make adjustments for things like stock-based compensation, shares a company pays to employees as an extra perk) work for the stock. However, heavy spending to transform the business into a more relevant one for the times has the bottom line stuck in a rut. Until that changes, there’s little compelling reason to consider the stock.

Check Point has been working hard to update its offerings for more modern needs, but the sheer number of newer start-ups could mean this established cybersecurity business will continue to get disrupted. That’s not an enviable situation to be in, especially when the industry overall is growing by double digits.

4. CrowdStrike: The newest stock on the top-10 list

Endpoint security company CrowdStrike more than doubled in value after it had its IPO (sold shares to raise money, making it available to the general investing public for the first time) in June 2019. That easily puts the firm among the largest in the cybersecurity business by market cap.

The stock has years’ worth of double-digit sales growth baked into it, but momentum could be on CrowdStrike’s side. Revenues more than doubled in 2018. The number of connected devices around the globe is increasing every year — by the hundreds of millions — which plays right into the hands of this security company and its endpoint-protection software suite. Since many of those devices are not tethered to an office or other physical location, CrowdStrike’s cloud computing-native system lends itself to this type of security particularly well.

Because it is cloud based, CrowdStrike also boasts the ability to make near-instant system updates when a threat is detected, and its software can learn and adapt from uploaded customer data. Paired with millions of new connections getting added to an internet-connected network every year, it adds up to lots of new customer sign-ups and expanding relationships with existing ones. Dollar-based net expansion (which measures how much money existing clients spend each year) has been over 100% for years, indicating customers spend more with CrowdStrike as time passes. It’s a powerful business model, one that CrowdStrike plans on putting to use in other security disciplines as it begins to expand beyond endpoint security. With the cloud and the number of endpoints increasing dramatically, it’s no wonder this stock is off to a hot start and looks like it has years’ worth of growth left ahead of it.

5. Okta: Keeping data on a need-to-know basis

Another upstart security company, Okta has only been around since 2009, but the identity-protection specialist has been growing like a weed. The company ensures that employees and others with privileged access within an organization get connected to the apps and data they need — and keeps everyone else out. The number of digital systems and software being utilized by organizations continues to rise, increasing the complexity and difficulty in keeping systems secure from intruders. Thus, the need for Okta’s identity services has been booming.

In just a few years’ time, Okta has become one of the largest cybersecurity pure plays around, with sales consistently growing north of 50% in the past. Management expects that trajectory will moderate to somewhere in the mid-30% range for the foreseeable future — still nothing to balk at. And that rate of expansion could be sustainable, too. According to the Global Market Insights cybersecurity report, identity, authentication, and access management services are expected to be an especially fast-growing subset of cybersecurity, with the potential for services to increase an average of 17% a year through 2024. At the forefront of the movement, Okta is primed to gobble up market share as identity and access management increases in importance.

Here’s the downside: Okta is not a profitable business as of this writing. The company is funneling cash into marketing and research to maximize its sales growth now. Profits will be a concern later. The good news, though, is that gross profit margin (the amount of money the company keeps after producing a service and then selling it but before paying other operating expenses) is on the rise as the company grows.

That bodes well for the future of this cybersecurity leader. Identity security/privileged data access rights is expected to be a high-growth segment of network security for the next few years, and Okta is a leader in the space.

6. Fortinet: Successfully bridging legacy security with the new

Another diversified provider of firewalls, cloud and endpoint security, and identity management, Fortinet took a hit amid worries that the trade war between the U.S. and China would dampen growth in the company’s important international markets — Asia and Europe specifically. Newer security upstarts have also disrupted some of Fortinet’s legacy offerings like hardware-based network security for on-premises protection. Economic and industry headwinds or not, though, this cybersecurity outfit is doing just fine.

Revenues and adjusted earnings were up 20% and 77%, respectively, in 2018. Fortinet has been adding dozens of new deals worth more than $1 million every quarter, winning customers over with its new and improved software suite aimed at keeping all parts of an organization safe. Although less aggressive in its acquisition strategy than Palo Alto Networks or Splunk, Fortinet continues to invest heavily in updating its offerings to keep its customers secure. The cloud has been an area of focus, as well as increasing the number of subscription-based software deals. The investments in new technology have been paying off and yielding results for shareholders, even as other legacy cybersecurity companies have been failing to make the cut.

As a result of its less aggressive nature, Fortinet also runs a profitable business where some of its competitors don’t — and the bottom line has been rising faster than sales as the company’s investments have started to yield results. Ample cash means this security business can continue to invest in its new high-octane segments like cloud, endpoint, and identity security, which bodes well for it being able to maintain its two-figure top-line growth rate for some time even as legacy lines of business fade. With a well-established presence in the industry and a successful business update strategy well underway and paying off, Fortinet is one of the best cybersecurity stocks around.

7. Symantec: The biggest cybersecurity company by revenue

Symantec is the world leader in cybersecurity services when using sales figures as the metric. With nearly $5 billion in revenue in the last year, it is nearly double the size of its younger peers like Palo Alto Networks. Yet despite Symantec’s leadership, its market cap lags. One of the oldest network security players around and owner of recognizable software names like LifeLock and Norton Antivirus, Symantec has had to deal with disruption and shifting technology that have left growth near nonexistent and profitability underwhelming.

Though Symantec has been updating its operations — it recently announced a new comprehensive cloud-based security suite covering everything from email to application login protection — results have been sluggish. Fiscal 2019 sales fell 2%. The company’s legacy operations are holding it back, and bloated operating expenses have meant paltry bottom-line earnings. Not exactly what investors should be looking for from the leader of a high-flying industry.

There could be hope of a rebound, though, as Symantec continues to work through its transition. Chipmaker Broadcom (NASDAQ: AVGO) thought there was value in Symantec and was reportedly interested in acquiring the old security company to add it to its growing software division. However, negotiations fell through, and Symantec will have to go it alone for now. Until the company can demonstrate a strategy that can gain some traction in the growing world of cybersecurity, Symantec will continue to struggle in the wake of younger and more nimble peers that started investing earlier in the shifting landscape.

8. Akamai: Guarding the security of the internet itself

The next security outfit on the list handles a different piece of the industry than any of the others covered thus far. Akamai (NASDAQ: AKAM) helps deliver and secure web content as it travels from its source to the end user, from live and streaming video to traditional web page text and pictures. The internet’s continual expansion has been a boon for Akamai, which has launched new services to cover new web applications (like video streaming) and new mobile device types to keep the internet connection to them secure.

Akamai’s traditional web business is a low- to mid-single-digit growth story, but its newer cloud security services have been growing well into the double digits. New services are still a small fraction of the whole, but they are a high-margin endeavor. Akamai’s bottom line has been getting a big double-digit boost as Akamai’s investment and spending on new web delivery applications subside and past spending starts to yield results.

Akamai has grown into one of the internet’s primary content delivery platforms, responsible for handling as much as a third of global web traffic. As such, this company will be slower moving than other security businesses, but Akamai still has growth prospects ahead of it. Internet infrastructure company Cisco expects web traffic — led by video content — to grow an average of 26% a year through 2022. That means Akamai’s newer business should continue to move the needle for some time; plus the overall operation is solidly in profitable territory. In short, the leading internet content delivery and security company should be a slow-and-steady play for the foreseeable future.

9. Zscaler: Another investment in the cloud

Back to small but up-and-coming cybersecurity. Zscaler has its sights set on securing cloud computing and thus built itself from the ground up as a cloud-only software suite. The world is going mobile, and so are business operations. With fewer centralized locations and more remotely connected devices popping up, Zscaler helps keep newer business networks safe for its customers and their employees.

With a business model similar to those of CrowdStrike and Okta, Zscaler plays in a new multibillion-dollar industry that will only continue to grow larger, and the company has been frank in saying it is all about maximizing growth right now. And no wonder, as Gartner says in its cloud research that annual spending will nearly double from 2018 to 2022 to more than $330 billion a year. Sales at Zscaler have been growing north of 60% year over year for some time, but what’s a few hundred million in annual sales when the whole market is worth hundreds of billions? The downside is that in spite of massive growth and a rosy outlook for the good times to continue, operating losses are still substantial. With Zscaler all about nurturing sales as fast as possible, the red ink is unlikely to disappear anytime soon.

Much like its start-up peers, though, Zscaler takes those losses by design as it keeps its foot on the gas. Gross profit margin was an enviable 81% at last report, one of the best in the industry. With profit potential like that in a fast-expanding cloud computing sandbox, it makes sense Zscaler is all about growth now and profit later. With the world going mobile, this security stock looks like an especially promising one in the years ahead as it takes advantage of its early cloud-based security lead.

10. F5 Networks: Lagging behind the cybersecurity growth average

F5 Networks provides hardware and software solutions that help companies keep their applications and app delivery secure. Similar to Akamai, the company’s legacy business isn’t exactly lighting the world on fire. However, newer services, particularly those aimed at cloud computing-based apps, are on a tear. To that end, F5 recently acquired app optimization and security peer NGINX for $670 million.

It’s a sizable sum but likely a prudent move for F5. The company has been reporting low-single-digit revenue growth the last few years — nearly all of which has been driven by big expansion in its software service segment. While the top line has been sluggish, the upside is that new software and security offerings are a much more profitable concern. As a result, earnings are up nearly 40% over the last trailing three-year stretch.

During its transition phase to more modern app security and delivery, F5’s stock has taken a beating. There’s worry that the transition will continue to be a bumpy one, thus making this stock among the cheapest in the cybersecurity industry. However, though the low valuation reflects the fact that F5 has fallen behind the curve in the digital age, F5 is an inexpensive play on digital security and delivery. With internet traffic and content delivery still a slow-and-steady endeavor, F5 can continue to thrive — albeit at a much slower rate than elsewhere in cybersecurity.

Bonus. Proofpoint: An up-and-coming communications security specialist

One of the smaller outfits in the security space, Proofpoint is worth a mention as a bonus number 11 on the top-10 list. The company specifically helps organizations keep their employees safe. Email attacks are a key pain point for many businesses, and securing communications in that department — as well as on social media, cloud applications, and mobile devices — is a specialty at Proofpoint.

Though a niche offering within the greater cybersecurity industry, Proofpoint is expanding fast. After the company grew 38% in 2018, management forecasted full-year 2019 revenue to be up at least another 22%. However, as with its high-powered sales-oriented peers, the company does run up big losses. As with many other cybersecurity plays we’ve been discussing, though, that’s due to Proofpoint reinvesting in itself to foster more growth.

Nevertheless, when we adjust the bottom line for one-time items and other noncash expenses, Proofpoint is free cash flow positive, a metric that has been steadily on the rise. That should help Proofpoint keep up its double-digit growth trajectory as employee access points via remote computers, smartphones, and other devices continue to boom in the States and especially overseas. It’s a much smaller business than the top 10 companies are, but this cybersecurity concern still offers a compelling growth story worth keeping an eye on as it keeps communications safe and secure.

Proofpoint will also likely see long-term benefit from the explosion in devices hooked up to a network in the years ahead. The workforce’s increasing mobility means keeping employee communications on lockdown will be an increasingly complex problem, one that this small security company can help solve.

An illustrated shield displayed on top of a wall of digital data.

Image source: Getty Images.

Choosing the right cybersecurity stock to invest in

Taking a high-level look at the biggest companies in the cybersecurity market is only the start to choosing an investment. Some of the stocks are buys, others not so much. As the industry is still in high-growth mode and adapting fast to technological developments, investors would be best off picking the companies posting the fastest revenue expansion rates and those that carry the highest gross profit margins. Click here for a discussion on the top cybersecurity stocks and an introduction on how to pick the best companies in the industry.

Before investing, though, it’s important to remember a few things. Though cybersecurity is one of the fastest-expanding industries around, with high growth expectations comes a high level of volatility. Stock prices can run higher very quickly — and reverse course just as fast. Only investors who have a long-term perspective (no less than a few years) and the ability to purchase a position over time (buying a few shares at a time on a set schedule, like monthly, quarterly, or whenever the stock dips in price by at least double digits) should consider buying.

For those with the time to wait, though, investing in cybersecurity should be a profitable endeavor. In a decade’s time, this top-10 list will no doubt look very different, but a few of these names will still be around and will likely be much larger than they are today.

More From The Motley Fool

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo owns shares of Fortinet, Microsoft, Okta, Palo Alto Networks, Splunk, and Zscaler, Inc. The Motley Fool owns shares of and recommends BlackBerry, Check Point Software Technologies, Microsoft, Okta, Palo Alto Networks, Splunk, and Zscaler, Inc. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.


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