We live in a low growth world with abundant liquidity. This means that any sectors offering growth potential are likely to see inflated values due to a simple supply and demand issue. So, it's interesting to note that cybersecurity stocks remain reasonably valued.
The cybersecurity ETF, HACK, has a price to earnings ratio of 25. This is cheaper than the S&P 500 (NYSE: SPY) especially as the industry is going to have much faster growth rates with higher margins.
Spending on cybersecurity by companies is going to increase at a cumulative annual growth rate of between 15 to 20% over the next decade. Companies are migrating to the cloud, not just data but increasingly the software that powers their business. This means protecting these operations becomes even more important.
Moving to the cloud makes companies leaner and more efficient but it does make them more vulnerable to hackers. Cybersecurity is increasingly like insurance in that it's a cost of business. The number and sophistication of these threats will continue to grow.
Recent earnings reports from these companies were pretty positive with companies raising guidance. The increase in remote work also increases the demand for cybersecurity as this creates another point of vulnerability that hackers can take advantage of.
Here are some of the most interesting cybersecurity stocks:
Cloudflare (Nasdaq: NET)
Cloudflare is the cybersecurity software behind most large websites that prevent DDOS attacks which previously used to shut down major websites. Cloudflare solves a major problem for businesses with any sort of online presence.
Unlike other cybersecurity stocks, Cloudflare is not cheap as it has an $11 billion market cap with $300 million in sales. However, it's growing sales at a 47% rate and has 77% gross margins. Further, the company is exceptional at retaining customers which is a testament to the effectiveness of its product.
FireEye (Nasdaq: FEYE)
FireEye is considered one of the leading companies in terms of cloud security. Its stock has been a major laggard relative to the Nasdaq and its peers. For the last 5 years, it's traded between $10 and $20.
Its current focus is on becoming profitable as it expects to turn a profit of around $70 million next year which will give it a forward price to earnings ratio of 40. Unlike other high-flyers, FireEye has less risk, but it's also showing slowing sales growth which is a major red flag.
ZScaler (Nasdaq: ZS)
Zscaler IPO'd in 2019 and is more than 5 times higher. It's also in the cloud security segment. Its strong performance, relative to FireEye, is due to its 40% sales growth and track record of customer retention which means most of its revenue is recurring.
Once a company starts using Zscaler's security products, they're less likely to switch which gives Zscaler pricing power and an opportunity to sell more services. The company saw a big increase with the increase in remote work as it offers a remote access service which was certified by the federal government due to its high-level of security.