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Near-Term Outlook for Security Industry: Prospects Look Bright
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The Zacks Security industry comprises companies offering on-premise and cloud-based security solutions. These can be used to identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, to name a few.
Industry participants offer different types of security solutions, most of which can be used interchangeably. These solutions can be roughly broken down into the following types:
Computer Security: These solutions provide protection from vulnerabilities in both software and hardware of a computer system. A computer can get infected via non-web things like USB cables, which can then affect the LAN and other systems, damaging important files in the process.
Cybersecurity: This umbrella term includes sections like web security, network security, application security, container security and information security, among others.
Information Security: This is concerned with any form of data security issue, be it physical data (in which case it may be included under computer security), or digital data (in which case it is considered part of cyber security). Further, physical data security issue can be present in non-computer devices, such as telephones.
Here are the three major themes in the industry:
Frequent cyber-attacks have increased the demand for security solutions. The worrisome trend has not only affected certain companies, but also threatened the national security of some countries. Firms operating in the security industry are positioned to benefit immensely as protection against spear phishing, credential-based attack, account takeover and ransomware attacks among others has become the need of the hour.
Enterprises are realizing the need for stricter security measures, which is pushing companies to increase spending in this space. Increased investments are also driven by ongoing digital transformation and proliferation of smart connected devices supported by AI and its tools like ML. However, growing incidents of AI and ML-driven advanced security attacks or “smart attacks” have become a headwind for industry participants, resulting in huge spending on advanced security solutions. With the global IT spending on “Security Technology” projected to exceed $124 billion in 2019 by Gartner, the prospects for the industry participants look bright from a near-term perspective, as it spells rise in sales of security products.
The ever-increasing demand for network, data and cloud security solutions, make revenue stream for the industry participants pretty stable. As more or more enterprises transition to the cloud, legacy security solutions are at the risk of becoming less relevant. However, security technologies related to network like firewalls and host-based security tools, among others, cannot be implemented effectively on the cloud, which is a setback for cybersecurity providers. Moreover, growing adoption of cloud-native technologies, such as containers and serverless infrastructure, particularly in DevOps, is a key catalyst. The spurt in containerized applications, running both on-premises and in the cloud, is boosting the container security market. Per Arcluster, the container security market is estimated to touch $2.25 billion by 2023.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #99, which places it at the top 39% of 256 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since Jan 31, 2019, the industry’s earnings estimates for the current year have revised upward by 1.7%.
Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector, S&P 500
The Zacks Computer Peripheral Equipment industry has outperformed the Zacks S&P 500 as well as its own sector in the past year.
The stocks in this industry have collectively gained 8% compared with the Zacks Computer and Technology sector’s growth of 2% and the S&P 500’s rally of 5.5%.
One Year Price Performance
Industry’s Current Valuation
On the basis of price-to-sales ratio (P/S), which is a commonly used multiple for valuing the Security stocks, the industry is currently trading at 8.6X, higher than the S&P 500’s 3.34X and the sector’s 3.77X.
Over the last five years, the industry has traded as high as 11.67X, as low as 6.20X and recorded a median of 7.92X, as the charts below show.
Price-to-Sales Ratio (TTM)
Price-to-Sales Ratio (TTM)
Stocks to Watch
Given the rising sophistication of cybercrimes and data breaches, higher spending on security solutions and increasing threats related to digital transformation across most end-markets should continue to drive growth for the industry participants.
However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.
Santa Clara, CA-based Palo Alto Networks (PANW - Free Report) has gained 0.8% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained stable at $5.40 over the past 30 days.
Headquartered in Sunnyvale, CA, Fortinet (FTNT - Free Report) returned 26.3% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained stable at $2.13 over the past 30 days.
Tel Aviv, Israel-based Check Point Software Technologies (CHKP - Free Report) has gained 9.1% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained unchanged at $6.07 over the past 30 days.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
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Near-Term Outlook for Security Industry: Prospects Look Bright
The Zacks Security industry comprises companies offering on-premise and cloud-based security solutions. These can be used to identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, to name a few.
Industry participants offer different types of security solutions, most of which can be used interchangeably. These solutions can be roughly broken down into the following types:
Computer Security: These solutions provide protection from vulnerabilities in both software and hardware of a computer system. A computer can get infected via non-web things like USB cables, which can then affect the LAN and other systems, damaging important files in the process.
Cybersecurity: This umbrella term includes sections like web security, network security, application security, container security and information security, among others.
Information Security: This is concerned with any form of data security issue, be it physical data (in which case it may be included under computer security), or digital data (in which case it is considered part of cyber security). Further, physical data security issue can be present in non-computer devices, such as telephones.
Here are the three major themes in the industry:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #99, which places it at the top 39% of 256 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since Jan 31, 2019, the industry’s earnings estimates for the current year have revised upward by 1.7%.
Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector, S&P 500
The Zacks Computer Peripheral Equipment industry has outperformed the Zacks S&P 500 as well as its own sector in the past year.
The stocks in this industry have collectively gained 8% compared with the Zacks Computer and Technology sector’s growth of 2% and the S&P 500’s rally of 5.5%.
One Year Price Performance
Industry’s Current Valuation
On the basis of price-to-sales ratio (P/S), which is a commonly used multiple for valuing the Security stocks, the industry is currently trading at 8.6X, higher than the S&P 500’s 3.34X and the sector’s 3.77X.
Over the last five years, the industry has traded as high as 11.67X, as low as 6.20X and recorded a median of 7.92X, as the charts below show.
Price-to-Sales Ratio (TTM)
Price-to-Sales Ratio (TTM)
Stocks to Watch
Given the rising sophistication of cybercrimes and data breaches, higher spending on security solutions and increasing threats related to digital transformation across most end-markets should continue to drive growth for the industry participants.
Currently, none of the stocks in the Zacks Security industry flaunts either a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.
Santa Clara, CA-based Palo Alto Networks (PANW - Free Report) has gained 0.8% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained stable at $5.40 over the past 30 days.
Headquartered in Sunnyvale, CA, Fortinet (FTNT - Free Report) returned 26.3% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained stable at $2.13 over the past 30 days.
Tel Aviv, Israel-based Check Point Software Technologies (CHKP - Free Report) has gained 9.1% in the past year. The Zacks Consensus Estimate for its current fiscal-year earnings has remained unchanged at $6.07 over the past 30 days.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>