3 Cheap Cybersecurity Stocks to Protect your Portfolio

October Is Cybersecurity Awareness Month, and these three stocks will benefit from growing cybersecurity threats.

Vikram Barhat 13 October, 2022 | 4:08AM
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Cyber-attacks, data breaches and high-profile ransomware attacks have been on the rise in recent years.  Americans lost a whopping US$7 billion to cybercrime in 2021, according to the most recent data from the FBI’s Cyber Division.

Even high profile celebrities aren’t immune from cybertheft that saw a 7% jump in 2021 as cyber crime figures grew from 791,790 reported cases in 2020 to 847,376 in 2021, per the FBI data. Cyber crimes know no national boundaries as they claim victims in multiple jurisdictions, rendering cybersecurity a global issue.

As government and corporations spend billions to beef up cybersecurity, it creates a tailwind for companies that provide internet-enabled protection services and products, a fast-growing, high-margin industry. Long-term investors may find attractive opportunities in the following stocks of companies that are at the forefront of combating cybercrimes globally and help businesses and governments keep their assets safe.

A pure-play cybersecurity firm, Palo Alto Networks (PANW) sells security appliances, subscriptions, and support into enterprises, government entities, and service providers worldwide. The company's product portfolio includes firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics.

Palo Alto Networks’ cybersecurity leadership is underpinned by its next-generation firewall appliance. Recently, the firm’s portfolio has grown beyond network security into areas such as cloud security and solutions to help automate security operations. “Palo Alto's nascent threat-prevention solutions will provide robust growth and a significantly improved margin profile as customers remain locked into its ecosystem,” says a Morningstar equity report.

As the quantity of data and traffic being generated off-premises grows, so does the complexity of an entity's threat management. “Network security can be attacked from various angles, and we think that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers,” says Morningstar equity analyst, Malik Ahmed Khan, who appraised the stock’s fair value to be worth US$197, incorporating a 5% free cash flow yield.

The firm has established security platforms, made up of various products needed, for network security, cloud security, and operations. “We believe the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate maintainable demand,” notes Khan.

Cybersecurity vendor Fortinet (FTNT) sells cybersecurity products and services to small and midsize businesses, enterprises, and government entities worldwide. Its products include unified threat management appliances, firewalls, network security, and its security platform, Security Fabric. The firm generates 38% of revenue from products and services account for 62% of sales.

Fortinet enjoys sustainable competitive advantage, or wide economic moat, which stems from customer switching costs and a network effect. “The company is a leading cybersecurity vendor that has developed considerable switching costs by becoming an essential piece of daily operations through protecting customers’ networks, users, and data, whether on-premises or cloud-based,” says a Morningstar equity report.

Fortinet boats a robust user base of over 550,000 customers who are, “More likely to stay with their established and trusted cybersecurity vendors to avoid security and IT network disruptions,” says Morningstar sector director Brian Colello.

Fortinet’s products and customers benefit from the addition of more customers, which enhances its cybersecurity solutions and brings in more customers, he adds.

“The company strongly generates returns on invested capital in excess of its weighted average cost of capital that we expect to endure for at least two decades,” notes Colello, who puts the stock’s fair value at US$68.

As cyber attacks become more masqueraded and elaborate in complexity, driving up the complications associated with cybersecurity management and threat prevention, Fortinet's products and services “will remain in high demand,” adds Colello.

A cybersecurity pureplay, Okta (OKTA) is a cloud-native security company that focuses on identity and access management. The firm targets two markets through its workforce identity and customer identity offerings. Its workforce offerings enable a company’s employees to securely access its cloud-based and on-premises resources.

“Okta is poised for long-term financial success as a leader in the identity and access management, or IAM, space,” says a Morningstar equity report, which forecasts continued demand for Okta’s products “as the shift to zero-trust security infrastructures and digital transformations continue unabated.”

Okta’s Identity Cloud, which weaves together the firm’s workforce and customer offerings, stands to grow in importance to its clients as zero-trust security infrastructures, digital transformations, and cloud migrations increase the company’s value proposition, the report notes.

While Okta lacks an economic moat, it “has a positive moat trend as the firm’s platform, impressive number of integration, and a broad range of SKUs have allowed the business to be on the cusp of generating high customer switching costs and a network effect,” says Khan, who pegs the stock’s fair value at US$71 and projects 29.5% annual revenue growth over the next five years with secular tailwinds behind its back.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Fortinet Inc60.78 USD0.91Rating
Okta Inc Class A89.76 USD1.72Rating
Palo Alto Networks Inc317.31 USD-0.74Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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