Cybersecurity stocks to look out for amid the crisis rocking the banking sector

You may think the time is right to move into cybersecurity stocks as private equity firms target the sector.

The IBD Computer-Software Security group ranks No. 101 out of 197 industry groups tracked. While the Nasdaq has rallied in 2023, some cybersecurity stocks remain in the doghouse. Meanwhile, the iShares Expanded Tech-Software ETF (IGV) for software growth stocks has gained 13.5% in 2023.

“(The) NASDAQ is up roughly 13% this year with over the last few weeks more investors quickly moving to large cap tech stocks in a jittery financial backdrop,” Wedbush analyst Daniel Ives said in a recent note to clients.

He added: “Large cap tech and sub-sectors such as cloud and cyber security are seeing much more resilient growth than the Street had anticipated.”

One bright spot: Palo Alto Networks (PANW) belongs to the IBD Leaderboard. Shares in Palo Alto Networks jumped on fiscal second-quarter earnings that trounced views, helped by what are known as next-generation cloud products. IBD recently featured Palo Alto as the Stock of the Day.

One question is how much companies will prioritize computer security in 2023 as they reassess information technology budgets.

December and January quarter earnings results were mixed. Shares in CrowdStrike Holdings (CRWD) climbed on January-quarter profit and revenue that beat consensus estimates.

Shares in Zscaler (ZS) fell on disappointing billings growth in its fiscal second quarter.

Fortinet (FTNT) reported fourth-quarter earnings, revenue and billings that topped estimates. However, FTNT stock has dropped out of the IBD 50 roster of growth stocks.

Meanwhile, Okta (OKTA) reported better-than-expected results on March 1. OKTA stock recently was featured as an IBD Stock of the Day.

Cybersecurity Stocks: Private Equity Firms

Cloud computing giants are changing the cybersecurity market with their own offerings, acquisitions and software marketing deals. Microsoft (MSFT) poses the biggest threat to incumbents in the sector as it sells multiple products to companies in discounted deals.

According to a Morgan Stanley survey of chief information officers in July, cloud computing and security software remain at the top of priority lists, followed by business intelligence/analytics, digital transformation and artificial intelligence.

Private-equity firms remain active. Thoma Bravo on Oct. 11 agreed to buy ForgeRock for $23.25 a share in an all-cash deal valued at about $2.3 billion. The deal represented a 53% premium to ForgeRock’s closing share price on Oct. 10. The deal is expected to close in the first half of 2023. FORG stock had retreated 65% in 2022 prior to the deal.

Earlier, Thoma Bravo acquired Ping Identity Holdings (PING) for $2.8 billion. Thoma Bravo also has acquired cybersecurity firms SailPoint Technology, Proofpoint, Sophos and Barracuda. The private equity firm has invested in cybersecurity startups, such as Illumio.

Also, private-equity firm Permira in May completed its purchase of Mimecast for $5.8 billion.

Private equity firm Vista Partners, a long-standing investor in KnowBe4 (KNBE), on Oct. 13 acquired KnowBe4 in a $4.6 billion leveraged buyout.

Federal Market A Tailwind?

Google-parent Alphabet (GOOGL) last year acquired cybersecurity firm Mandiant in an all-cash $5.4 billion deal. Mandiant is now part of Google’s cloud computing business.

Further, Google in 2022 acquired Siemplify, a security orchestration, automation and response provider, for around $500 million.

Still, some computer security firms could get a boost from new federal government initiatives.

The Cyber Incident Reporting Act of 2021 requires agencies, federal contractors and critical infrastructure operators to notify the Department of Homeland Security when a data breach is detected, a significant step in building security.

Some cybersecurity firms aim to use artificial intelligence to get an edge on hackers.

When the bear market eases, investors might consider the Global X Cybersecurity ETF (BUG) for a more broad exposure to the sector.

Further, Congress has finally passed legislation funding infrastructure projects, which is expected to include funding for federal, state and local cybersecurity infrastructure.

Cybersecurity Stocks With High Composite Ratings

But initial public offerings are on the table. SentinelOne’s 2021 IPO raised $1.2 billion.

Meanwhile, analysts say Netskope, Illumio and Menlo Security are among cloud security startups that could launch IPOs.

Analysts say a new wave of startups seems to be taking share from industry incumbents.

Darktrace (DARK) launched its IPO on the London stock exchange in April. Darktrace utilizes self-learning artificial intelligence tools in security automation.

Further, consolidation may be coming in the cybersecurity industry. Okta in early 2021 acquired privately held Auth0 in a $6.5 billion, all-stock deal. Also, Okta is expanding into new security markets to take on CyberArk Software (CYBR) and SailPoint.
Cybersecurity Stocks: Wide Range Of Products

Further, it behooves an investor to know which cybersecurity stocks address ransomware, phishing or other kinds of cyberattacks.

Meanwhile, CrowdStrike uses machine learning and a specialized database to detect malware on laptops, mobile phones and other devices that access corporate networks. In addition, many software companies are using artificial intelligence to get a competitive edge.

In addition, Zscaler is the biggest provider of cloud-based web security gateways that inspect customers’ data traffic for malware.

SailPoint, an identity management software maker, is among companies that garner more than 10% of revenue from government agencies.

Other cybersecurity firms with a sizable government business include Tenable, Rapid7 and CyberArk. Tenable in 2021 acquired France-based Alsid, which focuses on identity access management.

In addition, Rapid7 (RPD) and Qualys specialize in vulnerability management services.

Amid the rapid global spread of Covid-19, many companies instructed employees to work from home. That has increased demand for computer security products that support remote work.

The coronavirus emergency and shift to remote work has accelerated the growth of cloud-based network security. So the industry now has a new term for the infrastructure that supports distributed workers and branch offices.

It’s spelled SASE — pronounced “sassy” — and it stands for Secure Access Service Edge.
SD-WAN Technology Changes Security Needs

Corporate America has hiked tech spending on security aiming to protect intellectual property as well as consumer privacy. Hackers continue to steal credit card data and intellectual property.

Spending on security technologies has evolved as companies shift business workloads to cloud computing service providers. Amazon Web Services, part of Amazon.com (AMZN), is the biggest cloud services firm. Amazon looms as a potential rival as it builds more security tools into its cloud services.

Also, Fortinet competes with Palo Alto Networks and others in the firewall security market. Firewalls reside between private networks and the internet. They block unauthorized traffic and check web applications for malware.

As large companies shift to off-premise cloud computing services, one view is that firewall technology will play a lesser role. Fortinet has targeted software-defined wide area networks, or SD-WANs, an emerging computer networking technology.

Aiming to catch-up in SD-WAN technology, Palo Alto Networks acquired startup CloudGenix.
Cybersecurity Products Battle Ransomware, Phishing

Cybersecurity stocks span a wide-range of products and services. In addition, some security vendors are shifting to software-based subscription business models from selling hardware appliances. Among them, Proofpoint specializes in email and data-loss protection.

Meanwhile, hackers often aim to compromise networks by targeting employees or management who have administrative access. CyberArk manages privileged accounts. In addition, Okta provides identity management services.

To slow down hackers, more companies are focusing on internal security threats though a strategy known as Zero Trust. In addition, traditional security measures aim to keep the bad guys out of corporate networks. Further, network firewalls focus on intruders from the public internet.

Zero Trust cybersecurity models focus on internal threats, such as hackers stealing someone’s security credentials. Security firms verify the identity of network users and limit access to applications.

CrowdStrike, Okta, Netskope and Proofpoint recently formed a Zero Trust alliance. Targeting Zero Trust security, Cisco Systems (CSCO) in 2018 acquired Duo Security for $2.35 billion.

Also, many fast-growing cybersecurity firms are in the endpoint market. Their tools detect malware on laptops, mobile phones and other devices that access corporate networks.

This article was first reported by Investing .com