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Cybersecurity Stocks Rally as Market Mulls SolarWinds Hack's Fallout

The hack, which impacted many U.S. companies and government agencies, is expected to drive an uptick in IT security spending.
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Several security tech stocks are rallying as markets weigh the long-term fallout from a hack involving SolarWinds software that appears to have impacted a number of U.S. companies and government agencies.

As of the time of this article, FireEye  (FEYE) - Get FireEye, Inc. Report, which is both involved in investigating the SolarWinds hack and was impacted by it, is up 3.9%. CyberArk Software  (CYBR) - Get CyberArk Software Ltd. Report, whose software helps protect privileged user accounts, is up 2.8%; identity/access protection software firm Ping Identity  (PING) - Get Ping Identity Holding Corp. Report is up 2.7%; and endpoint protection software provider CrowdStrike is up 3.1%.

A few other security tech names, including Zscaler  (ZS) - Get Zscaler, Inc. Report, Palo Alto Networks  (PANW) - Get Palo Alto Networks, Inc. Report, and Qualys  (QLYS) - Get Qualys, Inc. Report, are each up a little over 1% amid a 0.4% gain for the Nasdaq.

To recap: Hackers believed to be linked to Russia’s foreign intelligence service (SVR) inserted malware into software updates for SolarWinds’ Orion IT infrastructure management software between March and June. This led to security breaches at the Treasury Department, the National Telecommunications and Information Administration (NTIA), the Department of Homeland Security (DHS) and a number of SolarWinds’ corporate clients.

The full scope of the hack, which reportedly allowed hackers to monitor Treasury Department and NTIA e-mails, is still being determined. But all signs suggest it was massive.

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SolarWinds says that up to 18,000 of its customers downloaded malware-infected Orion updates. In addition -- though these customer engagements don't necessarily involve organization-wide deployments of SolarWinds' software -- the company has previously said its customer base includes 425 Fortune 500 firms, the 10 largest U.S. telecommunications companies and all five branches of the U.S. military.

“To put it bluntly, based on all the initial data and speaking with our Beltway contacts, we believe this cyber attack will likely rank as one of the worst in the last decade, given the targeted and cyber espionage nature of this attack,” wrote Wedbush analyst Dan Ives in a note published on Wednesday morning. “This breach could not have come at a worse time, with nearly all government agencies as well as enterprises having employees work from home likely until at least mid-2021 and accessing applications/data from ubiquitous endpoints globally.”

Ives added that efforts to migrate workloads to cloud infrastructures “have put more targets on the backs of governments and enterprises around the globe by hackers, nation state attacks, and other bad actors,” and forecast that security vendors will benefit in 2021 “as more spending shifts towards broader cloud deployments.”

“We believe there is a $200 billion dollar growth opportunity in cloud security ‘up for grabs’ over the next five years for those vendors that have the solution sets to protect critical cloud deployments and seamlessly work with on-premise and public/hybrid workloads through a unified and deep solution set,” Ives wrote, while insisting Wall Street “is still underestimating” the growth prospects for well-positioned cloud security names.

It’s worth noting here that 2020 has to a large degree been a feast-or-famine year for security tech stocks. Firms that are growing fast and seen as well-exposed to cloud security and work-from-home trends have often seen their shares blast off, while the shares of companies with high exposure to on-premise security spending have often sputtered.

Certain companies, such as Zscaler, CrowdStrike and Cloudflare  (NET) - Get Cloudflare Inc Class A Report, are each up more than 200% year-to-date and now trade at very lofty multiples. However, firms such as CyberArk, Proofpoint  (PFPT) - Get Proofpoint, Inc. Report, Check Point Software  (CHKP) - Get Check Point Software Technologies Ltd. Report and Ping Identity have underperformed the Nasdaq by a healthy margin, and FireEye is down 11% on the year.