3 Cybersecurity Stocks to Buy as Data Breaches Rise

A spike in Internet crime creates a tailwind for these cybersecurity stocks.

Vikram Barhat 20 September, 2023 | 4:48AM
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In a world where data breaches and cyber threats continue to surge, the realm of cybersecurity is emerging as a formidable battleground. The recent cybersecurity attack on MGM Resorts International (MGM), which disrupted its hotel and casino operations, brought the spotlight back to the growing menace of cybersecurity crimes. 

Governments and corporations alike are funnelling billions of dollars into fortifying their digital defenses, unlocking robust revenue opportunities for companies specializing in internet-enabled protection services and products.

This dynamic landscape presents a fertile ground for investors to explore this rapidly evolving market -  an untamed frontier of digital disruption - and a dynamic sector that stands at the forefront of safeguarding our increasingly digitalized world.

 

A platform-based cybersecurity vendor, Palo Alto Networks (PANW) offers network security, cloud security, and security operations. The California-based firm has more than 85,000 customers globally.

As frequency of cyber attacks increase, companies face punitive regulatory fines along with reputational and commercial damage arising out of security lapses. This creates a strong tailwind for companies such as Palo Alto which is regarded “as a leader in multiple cybersecurity sub-segments, including network security, cloud security, and security operations,” says a Morningstar equity report.

The firm stands to “materially benefit from secular tailwinds across its three key verticals as cloud migrations shift to zero-trust security, and increased automation in cybersecurity increases Palo Alto’s value proposition to its clients,” the report adds.

The company’s wide economic moat, or sustainable competitive advantage, is underpinned by its sticky platforms, combined with a broad range of cybersecurity applications.

“The cybersecurity segment continues to increase in threat complexity and intensity,” says Morningstar equity analyst, Malik Ahmed Khan, who recently raised the stock’s fair value to US$245 from US$225, prompted by strong results and medium-term sales guidance.

The company clocked about US$2 billion in the fourth quarter sales, up 26% year over year, on the back of its next-generation security growth. 

As threat landscape evolves, IT security teams are seeking platforms that offer more holistic security coverage, which creates “an opportunity for platform cybersecurity vendors such as Palo Alto,” adds Khan.

 

Fortinet (FTNT) provides network security, cloud security, zero-trust access, and security operations. The cybersecurity vendor generates the bulk of its revenue from sales of its subscriptions and support-based business.

The California-based firm, which boasts over 500,000 customers across the world, is at the forefront of the convergence of networking and security. “The firm stands to materially benefit as secular tailwinds in network security and vendor consolidation increase Fortinet’s value proposition to its clients,” says a Morningstar equity report.

The company’s established customer switching costs, boosted by its hefty network effect, allows it “to continuously gain and expand the number of clients and has already enabled it to build a wide economic moat around its business,” says Khan, who pegs the stock’s fair value at US$68, incorporating a 19% revenue growth annually over the next five years.

Fortinet’s wide moat flows from strong customer switching costs and a strong network effect. The firm’s “platform approach to cybersecurity, by combining key aspects of a business’ security needs under one umbrella, has also enabled it to grow its wallet share among existing clients while adding new ones,” says Khan.

For that reason, he forecasts the firm to generate excess returns on invested capital over the next two decades.

Further, the company collects and analyzes rich data coming into its platforms. Hence, “as more data comes in, Fortinet’s platforms become better at detecting and mitigating cyberthreats,” argues Khan.

 

One of the largest software companies in the world, Cisco Systems (CSCO) provides networking equipment, including networking hardware and software and cybersecurity software like firewalls.

The firm’s wide economic moat stems from customer switching costs. Cisco provides a comprehensive and interlinked solutions for networking and cybersecurity, with software, hardware, and services that work together to create a sticky overall solution that allow for pricing power.

“Cisco offers a comprehensive platform for cybersecurity [and] is a strong incumbent vendor for network firewalls,” says a Morningstar equity report.

However, it has a rounded portfolio which also includes identity access management, cloud security, endpoint security, zero trust, and threat intelligence. Its cybersecurity software is deeply embedded in enterprise networks, which creates switching costs.

“These competitive advantages give us confidence in Cisco earning economic profits, more likely than not, over the next 20 years,” asserts Morningstar equity analyst William Kerwin, who puts the stock’s fair value at US$56, and forecasts a free cash flow yield of 7%, and 3% compound annual growth through fiscal 2028. 

Cisco also has a renowned cyber threat intelligence team, Talos, which collects threat data for Cisco products in order to detect, analyze, and protect customers from known and emerging threats. “These [features] help to further embed Cisco’s products into the workflows of a customer and make them harder to rip out,” Kerwin contends.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Cisco Systems Inc47.29 USD1.22Rating
Fortinet Inc58.56 USD1.07Rating
Palo Alto Networks Inc320.33 USD2.99Rating

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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