Industry leaders see cybersecurity among the top risks to their businesses, while consumers fear for their personal security. Governments see cyberattacks as the new face of warfare. And Jerome Powell, in his hearings to become the new Fed Chair, points to cybersecurity as the top threat facing our financial system. Three MoneyShow.com experts highlight nine emerging winners in this sector.
Rob DeFrancesco, Tech-Stock Prospector
There have been some interesting dynamics at play across the security sector so far in the third quarter earnings season. The vendors of next-generation security solutions have been turning in rather impressive quarters.
With more organizations realizing older technologies, such as firewalls and intrusion detection systems, can't really keep out the bad guys, demand is shifting to newer offerings provided by more nimble vendors, many of which try to mitigate breach damage from the inside.
As the enterprise shift to the cloud accelerates, organizations are rethinking their overall security strategies and retooling their security budgets. In digital transformations, it's no longer acceptable for security to be an afterthought. Proactive predictive counter-threat capabilities and automated remediation are the future of security.
Varonis Systems (VRNS - Get Report) specializes in managing and securing unstructured data inside the perimeter. Its DatAlert solution looks for insider threats and outsider attacks by analyzing account activity and user behavior against historical benchmarks, searching for deviations from the norm. Any activity that looks out of place is flagged for review, often leading to early breach detection.
A strong third-quarter report sent the stock surging as much as 23% in one trading session, hitting a new 52-week high. In the quarter, revenue of $53.6 million beat the consensus estimate of $50.6 million, with growth accelerating to 31% from 30% in the second quarter. For the fourth quarter, Varonis sees revenue of $50 million to $50.8 million, above the consensus of $49.7 million.
Qualys (QLYS - Get Report) , a provider of cloud-based vulnerability management solutions, saw third-quarter top-line growth accelerate to 17% from 14% in the previous quarter. Revenue of $59.5 million beat the consensus of $58.6 million, with earnings per share of $0.31 topping the consensus by $0.09.
Thanks in part to an expanded portfolio of products, the average deal size was up 17% year over year, while new customer deal sizes jumped 62%. Gross margin was strong at 80%. The Qualys Cloud Platform provides on-premises, cloud and endpoint security via always-on sensors that give continuous two-second visibility into an organization's IT assets.
The sensors are remotely deployable, centrally managed and self-updating. As of the end of third quarter, the company over the previous 12 months had deployed close to five million Cloud Agents, up 38% sequentially.
For the fourth quarter, Qualys's revenue guidance range represents growth of 18% to 19%, signaling another quarter of acceleration. For the full year 2017, the company now expects to expand the top line by 16% vs. the consensus growth estimate of 14.9%. Analysts on average had been calling for 2018 revenue growth of 16%, but the latest earnings numbers suggest Qualys could do closer to 19%.
Two other smaller cybersecurity companies to keep an eye on because of their advanced technologies and solid growth prospects are Rapid7 (RPD - Get Report) , a provider of security data analytics software, and Mimecast (MIME - Get Report) , which offers cloud-based email security solutions.
Rapid7 is on pace to deliver 2017 top-line growth of 25%, while Mimecast in fiscal 2018 (March) is expected to report growth of nearly 34%. Of the two, only Mimecast is profitable.
Rapid7 is unique in that its security platform combines vulnerability management, user behavior analytics (for incident detection and response) and IT log analytics (infrastructure monitoring and troubleshooting). The company has more than 6,500 customers and nearly a 40% penetration rate into the Fortune 1000.
Mimecast is benefiting from the big trend of corporate email systems migrating to the cloud, as well as the general transition to Office 365. Mimecast has been attracting larger accounts (the customer base totals 27,300) and expanding its deal sizes.
Mike Cintolo, Cabot Top Ten Trader
Cybersecurity stocks are starting to shape up. And if the group does get going, Proofpoint (PFPT - Get Report) looks poised to be a leader. Big investors are coming around to the view that, despite what looks like lots of competition from big players, Proofpoint is a few steps ahead of the field in terms of the results its products provide customers.
The company has made a name for itself as a leader in email and social media-related cybersecurity, (though it's expanding into many related hot spots), which is right where demand is spiking. In its quarterly threat report, the firm highlighted an 85% spike in email phishing scams and a huge 600% increase in malicious URLs.
The general move to Office 365 and other cloud-based products is also providing a long-term tailwind in demand. In the third quarter, revenues rose 35%, billings were up 33% and earnings were up 32%, all topping expectations.
Importantly, cash flow is much larger than earnings -- free cash flow was around $0.71 per share in the quarter (compared to $0.25 of earnings), and the top brass expects free cash flow to total around $2.20 this year and around $3 per share in 2018.
Longer term, there's plenty of opportunity for Proofpoint -- just among its current customers, it has the potential to triple its recurring revenue over time, which is one of many reasons the company has an early projection of well over $5 per share of free cash flow in 2020. Fundamentally, there's a lot to like here.
The stock formed a very deep base during late-2015 and 2016 when the market had its troubles. Now shares are close to getting going, as the stock recently closed at new all-time highs on solid volume. It still hasn't decisively broken out, but we're OK with a small position here and adding on the way up.
Brit Ryle, The Wealth Advisory
After weeks of sifting through hundreds of cybersecurity stocks on the market, I finally narrowed my list down to the four absolute best to help you build a top-notch cybersecurity portfolio that's bound to outperform the market and the rest of the industry.
First, there's L3 Technologies (LLL - Get Report) . It's a straight-up government contractor. And it provides more than just cybersecurity solutions. It also makes those body scanners you have to deal with at the airport.
The third is Science Applications International Corporation (SAIC - Get Report) . More than just a mouthful of a name, the company is a big-time government contractor. It works with the U.S. military and the Department of Homeland Security.
Finally, Palo Alto Networks (PANW - Get Report) gets the top spot in my cybersecurity portfolio. It gets a slice of every piece of the cybersecurity pie. Its customers include consumers, major corporations and government entities.
Over 85 of the Fortune 100 and more than 63% of the Global 2000 rely on Palo Alto for their cybersecurity needs. And 12% of the company's customers fall into the public sector -- think local, state and federal governments. Another 9% are from education, including some of the country's biggest colleges and universities.
And the customers are spread across the globe with North America accounting for 23%, Europe and Africa making up 27%, and Asia Pacific bringing it home with 30%.
And Palo Alto is adding more and more new customers every quarter, leading to massive revenue growth in subscription services over the past decade. That growth has been outpacing the industry by leaps and bounds. This year, the company brought in $1.8 billion -- a 28% increase over 2016.
CEO Mark D. McLaughlin knows that the U.S. is already behind the eight ball when it comes to cyber defense and cyber warfare. A West Point grad and former U.S. Army attack helicopter pilot, he's seen war. And he knows the next one will start in cyberspace.
His company is the only one giving total protection within one package. Other companies offer piecemeal solutions that have to be mixed and matched. But Palo Alto offers complete peace of mind with its total coverage system.
When it comes to cybersecurity, Palo Alto is the best of the best. It has a massive and growing customer base. It's providing security solutions to consumers, corporations and governments.
It's been growing revenue at a rapid clip since being founded. And it has the potential to keep growing them at an average of 20% or more a year for the next decade. That's why it should be your first investment in a cybersecurity portfolio.
(This article originally appeared Dec. 7 on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Cramer and other writers even earlier in the trading day.)
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