The cybersecurity market is projected to be worth over $200 billion by 2021. This translates to a 10% compound annual growth rate (CAGR) over the next five years. Now is the perfect time to grab a piece of this burgeoning industry. I have identified three perfect stocks primed to ride the wave to long-term profits.
First, let’s take a closer look at the market. The rapid expansion of cybersecurity is in response to a major problem facing our internet-connected society. Many incidents of fraud, theft, and other illegal activities have moved from the physical world to a far more difficult place to discover.
While crime is still rampant in the physical world, a clear majority of white collar crime has moved into cyberspace.
Police departments, and even many government agencies, are powerless to fight this hidden epidemic in the traditional fashion.
In 2014, it was estimated that $445 billion is lost annually due to cybercrime.
Cybercrime is targeted is at companies, governments, and individuals.
Bloomberg reports that 40 million people in the United States had their personal information stolen within the last year. Also last year, an unnamed oil company lost hundreds of millions of dollars in business opportunities when hackers obtained its oilfield exploration data.
Direct financial crime is the most well-known cybercrime, but trade secret and intellectual property theft is the most insidious and damaging. Think about it, if you have money removed from your bank account, you’ll probably find out about it quickly and can act to prevent another occurrence. However, if your company’s proprietary plans for a new product are stolen, you will never know until your competitor beats you to the market with the stolen idea. And it will be difficult for you to prove the theft ever took place.
Other dangerous yet difficult to prosecute cybercrimes can have a direct effect on investors. Financial market manipulation is prevalent on both the individual hacker and collective levels.
Politicians are starting to realize the cybersecurity-related risks inherent within the financial markets.
U.S. Rep. Mike Rogers, chairman of the House intelligence committee, has expressed his concern about this type of cybercrime.
“We have seen nation states on our trading networks and we haven’t fully answered the question of what were they going to do,” Rogers, a Michigan Republican, said. “Clearly, they weren’t going to steal it and run. But were they going to use that to manipulate the markets?”
The cybercrime wave across all its forms is what is driving the success of the cybersecurity industry. It takes specialized knowledge, data, and equipment to combat this scourge. Multiple companies have risen to fill the niche. There’s even an ETF dedicated to the space for instant diversification across firms.
Here are my three favorite cybersecurity stocks.
Palo Alto Networks (NYSE: PANW)
Palo Alto, a $12 billion market cap cybersecurity company based in Santa Clara, California, offers a next-generation security platform. The platform consists of three elements: Next-Generation Firewall, Advanced Endpoint Protection, and Threat Intelligence Cloud.
The stock price has plunged from a high in the $165.00 per share zone to a low near $128.00. Technical support at the 50- and 200-day simple moving averages offered little help to stop the plunge.
Shares are deep in the value-buy zone after the company reported depressing first quarter 2017 earnings. The stock has fallen over 20% year-to-date — and that is exactly why I am interested in it.
Palo Alto is shifting to the subscription-and-renewal model, which will drive growth by adding customers. The change should also help lift margins.
Analysts expect the company to triple its market share by 2024 due to its wide suite of security products. Add in the fact that the entire market is forecasted to grow to $202 billion over the next 6 years and it paints a very bullish picture for the company.
A CRN analyst report stated that, “the numbers for Palo Alto Networks are particularly impressive as no security vendor yet has been able to sustain more than 25 percent revenue growth for five years after hitting $100 million in revenue. However, Palo Alto Networks is on track to match Salesforce.com’s incredible growth trajectory with 140 percent CAGR in its first six years and on a path to conclude its fifth year at more than 50 percent revenue growth.”
Risks To Consider: The primary risk in any high-tech stock, regardless of its industry, is competition. Another company could arise with disruptive technology that makes everything else irrelevant in the market.
Action To Take: Enter long on an upside break of $130.00 per share. Our target price is $160.00 per share. Initial stops are suggested at $120.93 per share.
FireEye (Nasdaq: FEYE)
This $2 billion market cap cybersecurity company is trading lower by over 34% this year. The new low price creates a buying opportunity for savvy investors.
The company’s cybersecurity solutions combine its purpose-built virtual-machine technology, threat intelligence, and security in a comprehensive suite of products and services.
FireEye is following the larger players by transitioning to a subscription and services portfolio away from expensive hardware-based products. While FireEye remains an obvious strategic pick for the long term, analysts have downgraded the shares, resulting in a selloff. In addition, pressure from Palo Alto Networks has weighed on the share price.
The migration to the cloud and away from hardware remains untested, creating investor nervousness. However, the long-run benefits of cost savings and the ability to quickly morph as the market changes will pay off in spades going forward.
Risks To Consider: The same risks as any high-tech company as outlined above.
Action To Take: Wait for price to break above $14.00 per share to enter long. My target price is $18.00 per share and initial stops are suggested at $11.63 per share.
PureFunds ISE Cyber Security ETF (NYSE: HACK)
This is the solution for those who want to bet on the industry yet avoid single company risk. Despite low individual-company performance, this ETF is trading higher by over 5% year-to-date.
Action To Take: Buy now near $27 per share. Stops are suggested at $25.34 per share. Watch for a target price of $35.00 per share.
— David Goodboy
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Source: Street Authority