[ad_1]
Zacks Security’s industry is benefiting from high demand for cybersecurity offerings, as well as increasing needs for secure cloud-based networks and applications amid growing trends in hybrid operations. Companies in this space are benefiting from the growing demand for IT security solutions due to the rise in data breaches. Increasing demands for privileged access security on the back of digital transformation and cloud migration strategies are also driving demand for cyber security solutions.
Industry participants love Fortinet, Inc. FTNT, Check Point Software Technologies Ltd. CHKP and Qualis, Inc. KLIS benefit from the above trends. However, the industry’s near-term growth prospects are likely to be hurt as organizations pare back their investments in large and expensive technology products amid growing concerns about a global slowdown amid current macroeconomic challenges and geopolitical tensions. Supply chain disruptions, component shortages, product price inflation and a tight labor market are some of the hurdles players in the space have been facing in recent times. This, along with increased operating costs related to hiring new employees and sales and marketing strategies to capture more market share, is likely to weigh on margins in the near term.
Description of the industry
The Zacks Security industry includes companies that offer on-premises and cloud-based security solutions. The solutions can be used for identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, to name a few. Industry participants offer different types of security solutions, most of which can be used interchangeably. These solutions can be roughly categorized into three types — computer security, cyber security and information security. Computer security solutions provide protection against vulnerabilities in both the software and hardware of the computer system. Cybersecurity includes sections such as web security, network security, application security, container security, and information security. Information security deals with any form of data security issue, be it physical or digital data.
Major trends shaping the future of the security industry
Growing cyber threats increase the demand for IT security: Frequent cyber attacks drive the demand for security solutions. This trend has not only affected certain companies, but has also threatened the national security of some countries. It is notable that the prevailing global health crisis has led to newer forms of hacking and cybercrime, which companies and individuals are having a hard time dealing with. Firms operating in the security industry are working hard to solve these problems. These companies are positioned to benefit as protection against identity theft, credential-based attack, account takeover and ransomware attacks, among others, have become the need of the hour.
Accelerated digital transformation helps growth: Increasing demands for privileged access security on the back of digital transformation and cloud migration strategies are fueling the demand for cyber security solutions. The COVID-19 pandemic has further increased cyber attacks as businesses of all sizes move their operations to various online platforms. From education to entertainment, work to shopping and even healthcare have become virtual, causing high technology to permeate everyday life. This puts not only businesses, but also schools, hospitals and other organizations at risk of online attacks. While public institutions and large companies have always been targeted by hackers, smaller organizations with lower security standards are also on their radar. Further, the arrival of 5G will enable other devices to connect to the Internet, expanding the scope of the Internet of Things (IoT) and Artificial Intelligence (AI). While IoT and AI will simplify things, they will also increase the rate of cybercrime, given the increased reliance on technology.
Macroeconomic shocks can hurt IT spending: Businesses are delaying their big IT spending plans as the global economy weakens amid ongoing macroeconomic and geopolitical issues, as evidenced by Gartner’s latest IT spending report. The research firm’s report highlights that IT spending growth in 2022 will be much slower than in 2021 due to reduced spending in devices, software, IT services and communications services. Moreover, given the recessionary situation hovering around the world, we do not expect a strong recovery in IT spending at least in the first half of 2023. This does not bode well for the outlook of the IT security market in the near future.
Increased operating costs affecting profitability: In order to survive in the highly competitive IT security market, each player continuously invests in expanding their capabilities. Players in the space are aggressively investing in R&D to improve their product portfolio and improve their capabilities to provide customers with a complete security solution. Furthermore, companies invest heavily in improving their sales and marketing capabilities, especially by increasing their sales force. Therefore, increased operating costs to capture more market share are likely to reduce margins in the near term.
The Zacks Industry Rank indicates a bright outlook
The Zacks Security industry is placed within the broader Zacks Computer & Technology sector. It has a Zacks Industry Rank #42, which places it in the top 17% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically an average of the Zacks Rank of all member stocks, indicates a solid near-term outlook. Our research shows that the top 50% of Zacks Rank industries outperform the bottom 50% by a factor of more than 2-to-1.
The industry’s positioning in the top 50% of Zacks Rank industries is the result of a positive earnings outlook for the constituent companies as a whole. Looking at revisions to total earnings estimates, analysts appear to be bullish on the group’s earnings growth potential.
The industry’s 2022 earnings estimate moved to $1.07 earnings from 92 cents as of December 31, 2021. Similarly, the industry’s 2023 earnings estimate was revised upward by 31 cents to $111 from 0.11 to 112 dollars. .
Before we present a few stocks that you might want to consider for your portfolio, given their bright outlook, let’s take a look at recent stock market performance and the valuation picture.
The industry outperforms the sector and the S&P 500
The Zacks Security Industry has outperformed the broader Zacks Computer & Technology sector as well as the S&P 500 Composite over the past year.
The industry fell 2% during the period, compared with a 12.8% decline in the S&P 500 and a 29.2% depreciation in the broader sector.
One-year price performance
Current industry assessment
Based on the price-to-sales (P/S) ratio, which is a commonly used multiple to evaluate security stocks, the industry is currently trading at 8.56, higher than the S&P 500’s 3.51 and the sector’s 3.09.
Over the past five years, the industry has traded as low as 13.64X, as high as 10.55X and recorded a median of 8.00X, as the charts below show.
Price-to-Sales Ratio (Industry vs. S&P 500)
Price-to-Sales Ratio (Industry vs. Sector)
3 shares to buy
Qualis: The company offers cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures, thereby helping to protect their IT systems and applications from cyber attacks.
Qualis is benefiting from growing demand for security and networking products amid the growing hybrid workplace trend. Accelerated digital transformations by organizations are also driving demand for the company’s cloud-based security solutions.
Currently, Qualis has a Zacks Rank #1 (Strong Buy). You can see complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for 2022 earnings was revised upward to $3.62 per share from $3.55 per share in the last 30 days. Qualis shares have fallen 3.7% over the past year.
Price and consensus: KLIS
Fortinet: This Zacks Rank #2 (Buy) company is a provider of network security appliances and Unified Threat Management (UTM) network security solutions for enterprises, service providers and government entities worldwide.
Fortinet benefits from strong growth in its Fortinet Security Fabric, Cloud and Software Defined Wide Area Network (SD-VAN) offerings. Furthermore, sustained business wins, especially high-value ones, act as key drivers. Higher IT spending on cybersecurity is expected to help Fortinet grow faster than the security market. Also, FTNT’s focus on enhancing its UTM portfolio through product development and acquisition is a tailwind.
The consensus estimate for Fortinet’s 2022 earnings has been revised upward by 7 cents to $1.15 per share over the past 30 days. FTNT shares have declined 8.2% over the past year.
Price and Consensus: FTNT
Check Point software technologies: This Zacks Rank #2 company has evolved into a well-known provider of IT security solutions worldwide. The company offers a comprehensive range of software and combined hardware and software products for IT security.
Check Point Software Technologies is benefiting from growth in security subscriptions, supported by strong demand for its advanced solutions, primarily CloudGuard, Harmony, Sandblast Zero-day threat prevention and Infinity solutions. The increased demand for network security gateways that support higher capacities is helping the adoption of the company’s VPN solutions for remote access.
Several Infiniti deals in various industries, including government, telecommunications and industrials, are positive. The acquisitions helped it expand its portfolio and enter newer markets, ultimately driving its revenue. The company continues to win new client accounts, which increases revenues.
The Zacks Consensus Estimate for 2022 earnings has been revised a penny northward to $7.32 per share over the past 30 days. Shares of Check Point Software Technologies are up 18.9% over the past year.
Price and Consensus: CHKP
Want the latest recommendations from Zacks Investment Research? Today you can download the 7 best stocks for the next 30 days. Click to get this free report
Fortinet, Inc. (FTNT) : Free Stock Analysis Report
Check Point Software Technologies Ltd. (CHKP) : Free Stock Analysis Report
Qualis, Inc. (KLIS) : Free Stock Analysis Report
To read this article on Zacks.com, click here.
Zacks Investment Research
[ad_2]
Source link
