These are the six stocks to watch in the red-hot cybersecurity sector

 These are the six stocks to watch in the red-hot cybersecurity sector

As with many areas of the economy, enterprise technology spending was hurt by the Covid-19 pandemic. According to consulting firm Gartner, worldwide IT spending declined 3.2% last year to mark a rare rollback in this category.

One important exception was cybersecurity spending, which grew 6.4% in 2020. And this year the segment continues to grow at an above-average rate as Gartner estimates global spending on information security and risk management services will top $150 billion — up 12.4% from last year, and about double the 6.2% growth rate for worldwide IT spending as a whole.

The reason for this extra cash flowing into security should be obvious. From high-profile events, like the second wave of cyberattacks in May from the hackers that targeted SolarWinds to the all-too-familiar warnings we get from our phone or laptop about potential phishing schemes, we are surrounded by cyber risks in 2021. And the problem is not going away.

Many investors have jumped into cybersecurity stocks in recent years to capitalize on this trend. However, it’s important to note that even if the overall pie is growing, there are some companies that have a decidedly bigger piece of that pie — or at least a bigger appetite than the competition.

Here’s a look at a few entrenched stalwarts and a few hungry upstarts to watch in the cybersecurity space, and their outlook for the future in this high-growth area.

Stalwart: CrowdStrike

CrowdStrike Holdings Inc.
CRWD
is a $60 billion cybersecurity leader that has both size and momentum on its side.

The stock has had a pretty good run over the past year, with shares rising about 90% in the prior 12 months compared with about 30% for the broader S&P 500 Index
SPX.
That’s in large part because of projections for roughly 60% revenue growth this fiscal year and almost 40% next year despite an already impressive scale.

CrowdStrike is thriving because of its sophisticated Falcon technology, cloud-supported artificial intelligence platform that analyzes information in real time to detect and ultimately prevent cybersecurity attacks. According to internal information, this platform manages trillions of events every week — which in addition to being a staggering amount of crises averted, is also represents a huge amount of raw material to make its platform even smarter.

Admittedly, there’s a lot to like about this stock right now. But it’s hardly alone, as you’ll see from other names on this list. In fact, analysts at Morgan Stanley recently sounded a warning about how the increasing pressures of competition could post a risk. That said, in the near-term its hard to argue with either the share price or fundamentals of this leader.

Upstart: CyberArk

Representative of this kind of competition from smaller and hungry firms, CyberArk Software Ltd.
CYBR
has risen sharply lately on the heels of a strong third-quarter report and encouraging forward guidance — including an impressive bounty of 230 new customers added on the quarter.

Specifically, its move toward building a more reliable business is paying off as CyberArk posted an all-time best performance from its software-as-a-service offerings and its largest-ever sequential increase in the subscription portion of its annual recurring revenue.

CyberArk is certainly not a sure thing, of course. It is barely operating on the right side of profitability, without a lot of room for error as it invests in the future. But it is running with a tremendous track record of more than 12 consecutive quarters of earnings surprises to show it makes a habit of beating Wall Street expectations.

Investors need to expect volatility, as evidenced by plenty of ups and downs in share price over the past few years. That said, when things move in the right direction it can really pay off — as it has since spring, when CYBR stock nearly doubled from about $105 at their 52-week low to current levels around $200 per share.

Stalwart: Cloudflare

Riding high after its recent earnings report, Cloudflare Inc.
NET
is another dominant cybersecurity name that protects business-critical technology infrastructure for its clients. Particularly as the global workforce has been decentralized in the wake of the Covid-19 pandemic, these services are in greater need than ever before — and NET stock has surged roughly 10-fold since its 2019 IPO.

There’s a risk that the stock may have jumped a bit too much, too quickly, as Cloudflare now has a $70 billion market value despite revenue that’s tracking to finish 2021 at just under $700 million. That’s a heck of a multiple on sales, and with an operation that is essentially break-even, the price-to-earnings ratio is also high enough to give some investors a nosebleed.             

But the growth is real, with revenue set to rise 50% this year and 40% next fiscal year if forecasts hold. That success is built on a diverse customer base across technology, health care, financial services, retail and even government clients. It also has important strategic relationships with major Chinese firms including Baidu Inc.
BIDU
and JD.com Inc.
JD
— important inroads into a region that has perhaps even more growth potential than either North America or Europe.

Upstart: SailPoint

Though classified here as an upstart because of its size or general name recognition with most investors, SailPoint Technologies Holdings Inc.
SAIL
has operated since 2004 and in some ways is running just a half-step behind some of the biggest cybersecurity companies.

Consider that SAIL is set to finish this fiscal year with more than $400 million in revenue. That’s roughly where the aforementioned Cloudflare was at the end of its prior year. And based on recent SailPoint earnings delivered in early November, featuring a 39% surge in subscription revenue that helped it beat expectations on both third-quarter revenue and EPS targets, this stock is continually and rapidly building on that already substantial base.

Like other cyber plays — or more broadly, like many other enterprise tech firms — there are risks as SAIL is looking to move customers to a recurring revenue model. But with shares up about 75% in 2021, including a massive gap up of about 20% in a single session after this most recent quarterly report, all indications are that Wall Street is highly optimistic about both near-term momentum and the long-term potential of this cyber stock to deliver.

Stalwart: Fortinet

Leading cyber stock Fortinet Inc.
FTNT
is proof positive that there is still the potential for a lot of growth ahead for dominant players even amid all the competition from hungry upstarts.

Case in point: Fortinet’s run of impressive quarterly reports continued again this November with a Q3 performance that included a 33% jump in revenue and a big milestone as FTNT surpassed $1 billion in quarterly billings for the first time. So much for running out of runway.

What’s more, Fortinet isn’t resting on its laurels. One great example of that is its recent data center firewall refresh, which will not only keep customers in the fold but position the firm’s FortiGate next-generation firewall to drive more value from existing customer relationships but also prevent any hungry rivals from marketing their services as more up-to-date to claw away business.

The icing on the cake was an October authorization by Fortinet’s board to repurchase $1.25 billion worth of shares. That could help support current share prices and ensure the roughly 190% gains for FTNT stock over the past 12 months stick and future performance continues to be strong.

Upstart: SentinelOne

One of the newest kids on the cybersecurity block, SentinelOne Inc.
S
only offered up shares a few months ago. But after pricing shares at $35 apiece at the end of June, the stock surged 20% on the first day of trading to mark the highest-valued cybersecurity debut in history on Wall Street. And the fact that shares have only surged higher, trading north of $70 at present for a valuation of more than $19 billion, hints that this company is just getting started.

Of course, the downside is that we don’t have quite the record of public filings that you get with more established cybersecurity stocks. But the initial read on SentinelOne is encouraging, with a projection of more than 70% revenue growth next fiscal year above current levels. And its most recent quarterly report that dropped in September showed strong performance in the here and now, with the all-important metric of annualized recurring revenue surging almost 130% year-over-year.

What’s more, SentinelOne recently received a stamp of approval from Amazon Web Services that labels it as a specialized partner for security-focused applications. Considering that some of the world’s biggest companies use Amazon’s
AMZN
AWS infrastructure, including Netflix
NFLX
and Airbnb
ABNB
among others, that opens the door to some pretty lucrative future relationships.

Jeff Reeves is a MarketWatch columnist. He doesn’t own any of the stocks mentioned in this article.

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