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(844) 627-8267 | Info@NationalCyberSecurity

Best Cybersecurity Stocks | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware

There are some types of products that are always in demand. Food, shelter, energy, water — traditional things people can’t do without.

In a digital age, we need to add something else to the list: cybersecurity. People, corporations of all kinds, governments and universities, all operate in a digital world and need to protect themselves. That means the companies that help make cyberspace safe are ones that can offer good investment opportunities.

Introduction To Cybersecurity Stocks

Up until the 1970s, the development of computers didn’t really cross paths with people with nefarious motives. The term “hacking” really meant trying to learn by playing around with things. But as computers began appearing everywhere, tied into global networks and communicating with other systems on a regular basis, supporting people not always in an office, but getting digital access remotely from the road, the dynamics have changed.

“You can’t live without it,” says Taz Koujalgi, an equity research analyst at Wedbush Securities. “It’s not about people hacking into a network for the fun of it. It is nation state espionage. It’s professional criminals selling data or demanding ransom. This is not a hobby.”

Individuals, companies of all sizes and governments can all be targets, and they all need protection from a state of ongoing flux. “It’s a very rapidly developing area of technology,” says Dave Smith, head of technology investment and executive vice president at wealth manager Bailard. “The critical aspect is that the threat landscape has accelerated rapidly over the last five years. They gained so much sophistication and technical prowess, it’s become a more critical area of the IT budget.”

Even ten years ago, a company might typically need a handful of products, Koujalgi explains. The types of products needed to cover networks, connections to the Internet, servers, applications, mobile devices and traditional endpoints such as desktops and laptops has expanded to easily more than a dozen.

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Cybersecurity Trends

This has led to a conflicting pair of dynamics that traditionally has been called best-of-breed versus best-of-suite. Best-of-breed has meant products from companies that narrowly focus on one need or function, while best-of-suite is the best combination or platform offering multiple functions or capabilities, even if not the best offering in any one of them.

The development of cyberthreats and the costs of protection have emphasized the tradeoffs in cybersecurity. The constant development of new attacks and areas of concern has meant a need for ongoing development of responses. These often come from startups, many of which are privately held and some of which are public, allowing people to acquire shares. Such focused companies can provide best-of-breed singlemindedness.

However, for corporations and institutions, bringing together a growing and shifting set of products creates some significant challenges, causing a change in behavior.

“We see more companies consolidating cybersecurity products,” says Sivan Tehila, a program director and professor in cybersecurity at the Department of Graduate Computer Science at Engineering at Yeshiva University’s Katz School of Science and Health. “They used to use many different products for many different functionalities.” Now they want companies with platforms that can do more. “Most of the time, companies will prefer to speak to larger companies that can provide them with key functionalities and are more likely to remove products that are not must-have, but nice-to-have.”

In-house consolidation brings some significant benefits. Products from one company will tend to have pre-existing integration, so there is less work to get everything to work together. That not only reduces up-front work but should in theory improve ongoing efficiency in protection.

“Our opinion is that companies are increasingly looking to present their security professionals with a single pane of glass,” says Smith, referring to having all information come into a single view that can render decision support clearer and easier. “There’s a perception of paralysis by analysis. There’s too much data, too many alerts, too much data coming in from different solutions.”

And then there are financial benefits. Managing fewer vendors decreases internal operational costs and also opens the potential for negotiation of discounts.

Key Factors To Consider

As with any stock, there are multiple key factors to consider before making an investment. Start with financials. In a highly competitive and changing market, you want an investment to have sufficient capital to sustain itself through periods of growth and economic challenges. “The company should have a healthy current ratio, quick ratio or cash ratio, indicating that it has sufficient capital to manage its operations without needing to seek additional financing,” says Sankar Sharma, CEO of RiskRewardReturn.com.

That means you also typically want a company that is profitable. Often in technology, companies take on investment and burn cash in hopes of growing and becoming dominant in a niche. When successful, the value of an investment can grow, but that is far from certain.

In any case, a company “should exhibit consistent year-on-year growth, with the potential for such growth to continue in the future,” Sharma adds.

Also consider comparing unlevered and levered free cash flow. Unlevered free cash flow (UFCF) is the amount of cash a company generates before debt payments. The formula is net operating profit after tax (NOPAT) plus depreciation and amortization (which aren’t actual cash expenditures, although required for future planning), minus the increase in net working capital (NWC, or the money available to pay operating expenses, which needs to be kept aside), minus capital expenses. It’s the cash available. Levered free cash flow (LFCF), on the other hand, is the cash after debt payments.

The difference between the two gives a sense of what financial resources the company has at hand for growth, future investment and so on. The smaller a percentage LFCF is of UFCF, the tighter a debt tight rope a company walks. These are factors to be found in financial filings.

Two other things Sharma emphasizes is market penetration, so it has a strong enough distribution strategy to reach a wide audience, and a diversified portfolio that includes multiple products or services to provide financial stability.

In addition, given the changes in the industry, it’s important to find companies that have well-regarded technology and innovation. Look to trade publications, stories in business publications and customer reviews to find strengths and weaknesses.

Also, the smaller the company, the more important it is that it supports integration with larger platforms for two reasons. As there’s a trend toward broader cybersecurity platforms, a product that offers something they don’t need to accommodate the platform rather than expect the opposite. And the ability to integrate to major platforms is often a hurdle to the potential for an acquisition by one of the larger companies.

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Top Cybersecurity Stocks To Watch

As always, a stock that is a fit for one investor may be a poor match for another. However, here are some that any investor might want to at least consider.

CrowdStrike (CRWD)

CrowdStrike made its initial name in endpoint protection. And now? “They’re adding more and more products to become a platform like Palo Alto,” Koujalgi says. According to the company’s profile from S&P Global Intelligence, CRWD provides cloud-delivered protection for endpoints, cloud workloads, identity and data. Services include workload security, vulnerability management, managed security services, threat intelligence, and more. Working with channel partners—third-party technical companies providing other technical sales and consulting—the company sells subscriptions globally to its Falcon platform. There is good cash flow, with LFCF that has grown from next to nothing in 2019 to $728.5 million in its latest fiscal year, which ended January 2023. The company has been issuing new stock and financing to bring in more cash. There’s also heavy stock compensation ($526.5 million last fiscal year), but that is compared to a market capitalization of more than $35 billion, so about a 1.4% increase. Estimates of future revenue and profit growth suggest a move to profitability in the next year, with stock prices generally climbing since a relative low point in January 2023.

Fortinet (FTNT)

As Koujalgi notes, Fortinet has done a good job establishing a platform with “25 to 30 products,” which aren’t best-in-class but “good enough.” That’s not pejorative but a practical read on how corporations are looking at cybersecurity, depending on their risk profile. “Some are fine with that because they don’t want to deal with 25 different vendors,” Koujalgi says. “Others say they can’t compromise security.” But there are many companies in the first camp. The financials reflect the popularity. Revenue in 2022 was $4.4 billion with a net income of $857.3 million, which has been growing since 2015. Sharma says, “With more than 660,000 customers, 1,285 global patents and 50-plus enterprise cybersecurity products, Fortinet commands a significant presence in the cybersecurity field. Being listed in both Nasdaq 100 and the S&P 500 and holding a cash reserve of $2.3 billion, the company exhibits financial stability.” The market cap is about $62 billion and Sharma notes that “while the company’s increasing liabilities can be a cause for concern, they manage to counteract this through a diverse stream of product and service revenues.” Share prices are also significantly more affordable than competitors like Palo Alto and CrowdStrike.

Microsoft (MSFT)

Microsoft is a pricey stock, but it is also a lynchpin in the entire framework of IT given decades of savvy investment, innovation and development, smart distribution strategies and relationships with corporations. The company is highly diversified, with multiple product lines for consumers and for corporations. One of the areas it works in is cybersecurity. With so much software for endpoints, servers, networks and cloud computing, it would be difficult for the company not to be. “They’re the biggest security company in the world,” says Koujalgi. Microsoft disclosed $10 billion annual business in cybersecurity alone in 2020. That climbed to $15 billion in 2021 and $20 billion in 2022. “Nobody else has that scale,” Koujalgi says. Microsoft provides diversity in security products, industries served, geographic regions and sizes and types of customers. With a $2.6 trillion market cap, it is one of the largest companies in the world and also has a 0.79% dividend yield, which may not be high, but is still a boost to value.

Palo Alto Networks (PANW)

The company has very popular products with the broadest security, according to Koujalgi. “They’re adding more and more features,” he says. “That’s the name that comes up [with IT departments].” According to Sharma, “The recent earnings report of the company showcases itself as a leader in the security service edge (SSE), network firewall, and SD-Wan segments.” The market cap is about $71 billion with positive free cash flow of $2.7 billion “Despite having less cash in hand than Microsoft, its market penetration is noteworthy,” he adds. “In the third quarter fiscal year 2023 earnings call, Palo presented a strong growth picture of its offerings. While Palo Alto lacks a strong balance sheet compared to Microsoft, it has the early mover advantage.”

Investing In Cybersecurity ETFs

While platforms can provide diversity of products, customers and geographic regions, another choice for cybersecurity stocks can be exchange-traded funds (ETFs). Constructed to track indexes, sectors or investing concepts, you can buy and sell ETFs as you would stock shares and get greater diversity without the need to research, track and hold multiple stocks. Below are some to consider. For each, check the current mix of holdings to be sure you get the diversity you want and not a collection that, with investment weights, is more like owning two or three individual stocks. As true of so many cybersecurity stocks, the values of most are on the upswing since January 2023. Year-to-date daily total returns compare the total returns (increase in prices, dividends, and so on) on the day of writing with January 1, 2023.

ETFMG Prime Cyber Security ETF (HACK)

Year to date total return was 14.8% and HACK has a yield of 0.18%, with a net expense ratio of 0.60%. Top holdings include Zscaler, Booz Allen Hamilton, Fortinet, Palo Alto Networks and Leidos.

First Trust Nasdaq Cybersecurity ETF (CIBR)

Year to date total return was 18.0% and the yield is 0.33%, with a net expense ratio of 0.60%. Top holdings include Palo Alto Networks, Fortinet, Broadcom, Infosys and Cisco Systems.

Global X Cybersecurity ETF (BUG)

Year to date total return was 15.6% with a net expense ratio of 0.51%. The fund typically pays a yearly dividend in December. Top holdings include Zscaler, Palo Alto Networks, CrowdStrike, Fortinet and Check Point Software.

iShares Cybersecurity and Tech ETF (IHAK)

Year to date total return was 15.3% and the yield is 0.10%, with a net expense ratio of 0.47%. Top holdings include VMWare, Fortinet, Science Applications International, Palo Alto Networks and ZScaler.

Cybersecurity FAQs

What are the top cybersecurity stocks to invest in?

Some major names are Microsoft, Palo Alto Networks, Fortinet and CrowdStrike.

How can I evaluate the financial health of cybersecurity stocks?

Using standard types of financial analysis, including looking at revenue and profit growth, levered free cash flow, debt levels and ratios like current ratio, quick ratio or cash ratio.

Are cybersecurity stocks a good long-term investment?

Cybersecurity capabilities for individuals, corporations, institutions and governments are a must. Threats keep becoming more sophisticated, requiring upgrades and additional offerings so investing in this industry seems like a solid bet.

Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.


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