Data breaches are starting to hurt the profits and balance sheet of most major companies and this has created a unique opportunity for investors in cybersecurity companies. A recent report from IBM Security confirmed that the average total cost of a data breach in 2017 amounted to around $3.62M or around $141 per record. The real-world costs are even harder to swallow, as Home Depot found out in 2017 when it suffered a data breach costing $179M.
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Companies are now scrambling for long term solutions to data breaches and the general vulnerabilities surrounding cybersecurity. This is pushing the profile of the cybersecurity sector higher by the year. Data from Cyber Security Ventures, a prominent researcher in the space, estimate that spending on cyber security is predicted to reach $1T by 2021. This is tracking from 2017 as a baseline. Gartner Inc. is less comprehensive in its forecast but it has put the marker down at $86.4B for cybersecurity spending in 2017 – a 7% uptick from 2016 figures. The forecast for 2018 is a staggering $93B, making cyber security one of the hottest sectors for growth over the coming years.
The explosion in spending in the cyber security space has created its fair share of opportunities for investors; and while there are many companies cutting their teeth ion the space, only a few stand out as investment grade in the current climate. Let’s take a look at the top five below.
Palo Alto Networks (NYSE:PANW)
One of the truly big players in the cybersecurity space, Palo Alto Networks (NYSE: PANW) provides a wide array of security platforms solutions globally. Since founding in 2005, the company has gone on to develop some of the most recognizable products in the firewall and end-point protection. This has resulted in a steady growth in company revenues which topped $1.8B in 2017. PANW is also impressing very well with its pace of short term growth, clocking a 27% growth in Q4 revenue for 2017. The outlook for 2018 and beyond is considerably bullish according to some analysts. They point to the significant increases in the lifetime value of PANW’s top-tier customers. These customers spent so much more money with the company in 2017 that Q4 revenue in this particular customer segment jumped 53%. Projected revenue for 2018 is $2.16B and analysts have set a one-year price target for the stock at $197.35. At this writing PANW is trading just south of $190 at $189.24. Market cap is an impressive $17.3B.
Cisco (NASDAQ:CSCO) earned its reputation serving the networking infrastructure for much of the internet and global networking space, but its profile is now taking shape inside the burgeoning cybersecurity space. In 2017 CSCO saw a 8% increase in its cybersecurity business, signaling the seriousness of management to carve out a piece of the ever increasing cybersecurity pie. The increase delivered $585M to topline revenues, but more importantly, it has highlighted why CSCO should be taken as a serious player. Those revenues, though relatively small compared to CSCO’s core business, represent much larger performance numbers than many dedicated cybersecurity space. For analysts this suggests that with its vast technological assets, plus its capital, CSCO could very well end up dominating the space in the coming years.
Check Point Software Technologies (NASDAQ:CHKP)
Check Point Software Technologies (NASDAQ:CHKP) is fast becoming one of the most nimble and efficient players in the cybersecurity space. Its numbers haven’t been as bulky as many of its counterparts, but solid growth has ensured that it has one of the most attractive valuations in the space. CHKP has outdone many of its peers, managing to drive its trailing P/E ratio down to 22.1 while keeping its forward P/E ratio at 17.9. This is significant considering that the industry P/E ratio for cybersecurity is a bloated 148.4. CHKP has managed to trim its spending, becoming leaner and more focus. The result has been a 6% revenue increase over 2016, but more crucially, the company delivered GAAP earnings of +18% year-over-year.
FireEye, Inc. (NASDAQ: FEYE)
Founded in 2004 by Ahsar Aziz, FireEye, Inc. (NASDAQ: FEYE) has risen to become one of the most watched companies in the cybersecurity space. In January 2018 the company announced the acquisition of X15 Software, a software company that helps to sift through billions of bits of machine-collected data. The acquisition which cost the company $5M in cash plus $15M in equity is expected to add massively to FEYE’s cybersecurity profile.
VeriSign, Inc. (NASDAQ: VRSN)
VeriSign, Inc. (NASDAQ: VRSN) is as much a part of the internet as any other company founded around the same time it was back in 1995. Although VRSN doesn’t enjoy the scope of popularity as companies such as Google and Yahoo, its core offerings have helped to bring it to the front of the conversation in the cybersecurity sector. It is VRSN that provides a big part of the underlying encryption among the webs billions of websites. Thanks to its domain registry service which handles the core of the internet’s Domain Naming System, VRSN has become an integral part of the technological growth story. And as the internet has grown so too has the company’s revenues. Revenue for 2016 was a staggering $1.142B. And a recent affirmation by Moody’s confirms that VRSN is set on a stable path both operationally and strategically. According to the Moody’s report, VRSN is on track to manage its capital structure in line with the target EBITDA of 3.0 – 4.0. VRSN’s capacity to maintain its free cash flow within 20% of total debt was also cited as a positive in the Moody’s report.
It is clear that over the coming years that cybersecurity stocks will become even more popular as vehicles for both capital and revenue growth for investors. Already this upside is starting to price itself into cybersecurity ETFs. HACK, one of the most popular cybersecurity ETF’s, is enjoying its best run since launching in 2014. This is very compelling confirmation that the cybersecurity sector is here to stay; it also confirmation that the five stocks outlined above, are the best in breed, and deserves to be explored.