Cybersecurity Stocks to Consider Amid the Growing Menace of Cyberattacks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three cybersecurity stocks gaining momentum from recent events. With the prevalence of cyberwarfare and the likelihood of the tactics used growing in complexity, should you consider these three cybersecurity stocks of Check Point Software Technologies Ltd. (CHKP), CyberArk Software Ltd. (CYBR) and Fortinet Inc. (FTNT)?
Cybersecurity Recent News
The possibility of cyberattacks looms large, posing a continued threat to global financial stability and critical infrastructure. The Financial Stability Board (FSB) cautioned that the inadequate containment of a significant cyber incident could severely disrupt financial systems, including crucial financial infrastructure, with far-reaching implications for broader financial stability.
The potential economic costs associated with such events are substantial, and the impact on public trust and confidence can be significant. Projections indicate that worldwide cybercrime costs are anticipated to total a staggering $9.5 trillion in 2024 and $10.5 trillion by 2025, according to Cybersecurity Ventures.
The escalating sophistication of cyberthreats closely mirrors that of the rapid technological advances. This underscores the critical significance of cybersecurity in safeguarding against potential cyberattacks. In the five years from 2015 to 2019, North Korea stole around $2 billion from at least 38 countries, according to a report. This amount is more than three times the funds North Korea managed to generate through counterfeit activities in the preceding four decades.
The challenge of cyberattacks extends to the very core of American infrastructure. Despite recent enhancements through automation and emerging technologies, the U.S. energy grid remains predominantly reliant on legacy systems. Notably, 70% of transmission lines are at least 30 years old, nearing the end of their life-span, and 60% of circuit breakers exceed 35 years in age, according to Forbes. The aging infrastructure, coupled with rising power demands, renders the energy grid susceptible to cascading failures, where the breakdown of one component triggers a series of failures. The General Accounting Office (GAO) has highlighted the vulnerability of the U.S. energy grid to cyberattacks, stating that the grid’s distribution systems have become more susceptible.
Given the interconnected nature of modern infrastructure and the increasing sophistication of cyberthreats, cybersecurity has become a critical aspect of ensuring the resilience and security of essential services. Cybersecurity stocks have benefited from the possibility of more online attacks. Firms such as those in this article might be of interest to investors.
Grading Cybersecurity Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three cybersecurity stocks — Check Point Software, CyberArk Software and Fortinet — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Cybersecurity Stocks
What the A+ Stock Grades Reveal
Check Point Software Technologies Ltd. (CHKP) develops, markets and supports a range of products and services for information technology (IT) security. The company’s products and services are sold to enterprises, service providers, small and medium-sized businesses and consumers. It offers enterprises a platform to deploy independent, modular and interoperable security applications (software blades), such as firewall, virtual private network (VPN), intrusion prevention system (IPS), application control, anti-bot, antivirus, data loss prevention, policy management, event analysis or multi-domain management.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Check Point Software has an Earnings Estimate Revisions Grade of C, based on a score of 54, which is neutral. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Check Point Software reported a positive earnings surprise for third-quarter 2023 of 2.5%, and in the prior quarter reported a positive earnings surprise of 5.5%. Over the last month, the consensus estimate for the fourth quarter of 2023 has remained the same at $2.478 per share, with 23 upward and five downward revisions. Over the last month, the consensus estimate for full-year 2023 is unchanged at $8.329 per share, in spite of 30 upward revisions.
The components of the Growth Composite Score consider a company’s success in growing sales on a year‐over‐year and long‐term annualized basis and its ability to consistently generate positive cash from its core operations. The company currently has a Growth Grade of A, with a score of 89. The company has a five-year sales growth rate of 4.7% and has seen sales increase year over year for five consecutive years. Cash from operations has also been positive in the past five years.
The company has a Value Grade of D, based on its Value Score of 31, which is expensive. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). The price-to-sales ratio is 7.14, compared to the sector median of 1.80, which gives it a rank of 87. The enterprise-value-to-EBITDA ratio is 16.0, compared to the sector median of 12.8, ranking in the 74th percentile.
CyberArk Software Ltd. (CYBR) is an Israel-based provider of IT security solutions that protects organizations from cyberattacks. The company’s software solutions are focused on protecting privileged accounts, which have become a critical target in the life cycle of cyberattacks. The Privileged Access Security solution consists of various products, such as Shares technology platform, Enterprise Password Vault, SSH Key Manager, Privileged Session Manager, Privileged Threat Analytics, Application Identity Manager, CyberArk Conjur, Endpoint Privilege Manager and On-Demand Privileges Manager. The Enterprise Password Vault provides customers with a tool to manage and protect all privileged accounts across an entire organization, including physical, virtual or cloud-based assets.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
CyberArk Software has a Quality Grade of C, with a score of 53. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures. The company ranks strongly in terms of its gross income to assets and change in total liabilities to assets. The company has a gross income to assets of 29.3% and a change in total liabilities to assets of 3.0%. The sector median change in total liabilities to assets is 0.3%.
CyberArk Software has a Value Grade of F, based on a score of 2, which is ultraexpensive. The company has a rank of 98 for the price-to-free-cash-flow ratio and 92 for the price-to-sales ratio. The company has a price-to-free-cash-flow ratio of 319.8 and a price-to-sales ratio of 12.04. CyberArk Software’s price-to-book ratio is 11.67, whereas the sector median is 2.20. The shareholder yield is –2.6%, which translates to a rank of 68.
CyberArk Software reported a positive earnings surprise in third-quarter 2023 of 80.3%, and in the prior quarter reported a positive earnings surprise of 124.0%. Over the last month, the consensus estimate for the fourth quarter of 2023 has remained the same at $0.468 per share despite 22 upward and zero downward revisions. Over the last month, the consensus estimate for full-year 2023 has also remained the same at $0.782 per share, though there were 26 upward revisions.
CyberArk Software has a Growth Grade of A, based on a score of 94. One of the growth metrics above the sector median is the five-year average sales growth rate, at 17.7%. The company has a Momentum Grade of B, with a score of 86. CyberArk Software has above-sector-median relative price strength in all four recent quarters.
Fortinet Inc. (FTNT) offers cybersecurity and networking solutions. The company provides cybersecurity solutions to a variety of organizations, including enterprises, communication service providers, security service providers, government organizations and small businesses. Product offerings consist of core platform network security products and enhanced platform technology products, which are offered in a range of forms spanning physical appliances, virtual appliances, software and cloud-hosted services. Its secure networking solutions enable the convergence of networking and security to provide next-generation firewall, software-defined wide area network (SD-WAN) and secure access service edge. Its Zero-Trust Network Access solutions enable customers to know and control who and what is on their network. Its FortiGuard security services counter threats in real time with coordinated protection powered by artificial intelligence (AI).
The company has a Value Grade of F, based on its Value Score of 12, which is ultraexpensive. Fortinet’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 39 for shareholder yield, 88 for the price-to-sales ratio and 91 for the enterprise-value-to-EBITDA ratio. The company has a shareholder yield of 0.6%, a price-to-sales ratio of 8.10 and a 33.8 enterprise-value-to-EBITDA ratio.
Fortinet has a Quality Grade of A, with a score of 93. The company ranks strongly in terms of its gross income to assets and F-Score. Fortinet has gross income to assets of 52.9% and an F-Score of 8. The sector median gross income to assets is 27.8%, and the median F-Score is 4. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The only quality metric that ranks below the sector median is its change in accruals to assets, at –15.0%, compared to the sector median of –9.3%.
Fortinet reported a positive earnings surprise for third-quarter 2023 of 12.6%, and in the prior quarter reported a positive earnings surprise of 11.1%. Over the last month, the consensus estimate for the first quarter of 2023 has remained the same at $0.433 per share despite 21 upward and one downward revision. Over the last month, the consensus estimate for full-year 2023 has remained the same over the past month at $1.559 per share.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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