3 Cybersecurity Stocks to Consider

These tech companies are well positioned to benefit as global spending on cybersecurity is set to exceed US$150 billion in 2021, growing 12.4% year over year. They offer innovative security products and systems that help businesses and governments stave off cyber threats and guard against various security challenges of digitization. A pullback in valuation could turn these fairly-valued stocks into attractive opportunities in a high-growth industry. 

A pure-play cybersecurity company, Check Point Software Technologies (CHKP) offers solutions for network, endpoint, cloud, mobile security, and security management. It sells products, licenses, and subscriptions to enterprises, businesses, and consumers. The Americas accounted for 45% of its 2020 revenue, while the rest came from Europe (43%), and Asia-Pacific, Middle East, and Africa (12%).

The Tel Aviv, Israel-based cybersecurity provider is a leading player in the market. “Security is an increasingly complex problem due to data proliferation, cloud-based networking, and a growing quantity of remote endpoints,” says a Morningstar equity report.

A customer base of over 100,000 businesses and renowned product leadership, and a consolidated security architecture provide Check Point “ample upselling and cross-selling opportunities as enterprises increase their reliance on cloud-based products and distributed networking,” says Morningstar equity analyst, Mark Cash, who expects the firm to drive growth by ramping up sales and marketing efforts to promote next-generation security offerings.

Narrow-moat Check Point’s second-quarter results show a 4% year-over-year revenue growth and an accelerating security subscription growth (12%), which more than offset the weakness in products. “We expect this momentum to continue leading the way,” forecasts Cash, who puts the stock’s fair value at US$132, and projects the firm’s ROI to outpace the cost of capital for at least the next decade.

A pureplay cybersecurity vendor, Okta (OKTA) provides workforce identity and customer identity solutions. The company sells products to protect employees, contractors, and partners as well as its customers' end users. Okta's cloud-based software solutions offer customers security protection across a wide swath of applications considered critical to business and government needs.

California-based “Okta's cloud-based identity access solutions upended the prevailing methodology of protecting users and providing access to digital resources based upon on-premises products,” says a Morningstar equity report, stressing that the firm’s innovative solutions for user access and security will provide it with a sustainable presence.

The company is expected to see strong revenue growth as well as significant margin expansion, the report adds.

Okta addresses two primary markets through its workforce identity (for customer’s employees) and customer identity products (for customers’ customers). “Okta melded these two distinct markets within its identity cloud, and has a robust integration network that simplifies identity access and security protocols for the applications its customers rely on,” says Cash, asserting that the cybersecurity firm’s solutions will be in high demand “due to entities desiring a seamless experience for its employees and customers when accessing requested applications, while also ensuring that networks are protected.”

Not only does Okta boast a burgeoning customer base and larger deals, but it is also pushing to gain more enterprise clients while expanding internationally. “The company has become a favourable partner with large system integrators, which we expect to help its growth plan with large customers undergoing digital transformation and market expansion efforts,” says Cash, who puts the stock’s fair value at US$250.

Palo Alto Networks (PANW) is a pure-play cybersecurity vendor that sells security appliances, subscriptions, and support to enterprises, government entities, and service providers worldwide. The company's product portfolio comprises firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics.

The California-based vendor has rapidly emerged as a leading cybersecurity provider on the back of its next-generation firewall appliance, scoring new businesses. “Its innovative and effective cybersecurity products penetrated customer networks, and we believe replacing Palo Alto products and services would be considerably disruptive,” says a Morningstar equity report, adding that the company has developed “considerable switching costs by becoming an essential piece of customer networks.”

Its portfolio has expanded beyond network security to such fast-growing areas as cloud protection and automated response. “Looking ahead, we think Palo Alto's nascent threat-prevention solutions will provide robust growth along with a significantly improved margin profile,” notes Cash, who appraised the stock’s fair value to be worth US$400.

In the current environment of increasing off-premises storage of data and the growing instances of cyberattacks, security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers, argues Cash.

Palo Alto's security operating platform provides centralized security management, a boon for IT teams seeking security consolidation of disparate solutions.