Yahoo Finance 2 Security Stocks to Watch Amid the Industry Weakness
Organizations are pushing back their investments in big and expensive technology products on growing global slowdown concerns amid the current macroeconomic challenges and geopolitical tensions, thereby making the outlook for the Zacks Security industry gloomy. Of late, supply-chain disruptions, component shortages and product cost inflation are some headwinds players in the space have been encountering. These, along with elevated operating expenses related to hiring new employees, and sales and marketing strategies to capture more market share, are likely to strain margins in the near term.
Despite such concerns, industry participants like Qualys, Inc. QLYS and Absolute Software Corporation ABST are likely to benefit from the rising need for IT security solutions due to a surge in the number of data breaches. Increasing requirements for privileged access security due to digital transformation and cloud migration strategies are also fueling the demand for cybersecurity solutions.
Industry Description
The Zacks Security industry comprises companies offering on-premise 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, Cybersecurity and Information Security. Computer Security solutions provide protection from vulnerabilities in both the software and hardware of a computer system. Cybersecurity includes sections like web security, network security, application security, container security and information security. Information Security is concerned with any form of data-security issue, be it physical or digital data.
Major Trends Shaping the Future of the Security Industry
Rising Cyber Threats Boost Demand for IT Security: Frequent cyberattacks are spurring the demand for security solutions. This trend has not only affected certain companies but also threatened the national security of some countries. The prevailing global health crisis has given rise to newer forms of hacking and cybercrimes, which are difficult for firms and individuals to deal with. Firms operating in the security industry are working hard to address these concerns. These companies are positioned to benefit as protection against spear phishing, credential-based attack, account takeover and ransomware attacks, among others, has become the need of the hour.
Accelerated Digital Transformation Aids Growth: Increasing the requirement for privileged access security with digital transformation and cloud migration strategies is fueling the demand for cybersecurity solutions. The pandemic has further increased cyber onslaughts as businesses of all sizes are transitioning their operations to various online platforms. From education to entertainment, working to shopping, and even healthcare has gone virtual, causing high technology percolation in everyday lives. This not only puts businesses but also schools, hospitals and other organizations at risk of online assaults. While public institutions and large companies have always been the target of hackers, smaller organizations with lower security standards are also on their radars. Further, the advent of 5G will enable other devices to connect to the Internet, thereby expanding the scope of the Internet of Things (IoT) and artificial intelligence (AI). While IoT and AI will simplify things, these will also aggravate the rate of cybercrimes, given the increased reliance on technology.
Macroeconomic Headwinds Might Hurt IT Spending: Enterprises may postpone their large IT spending plans due to a weakening global economy amid ongoing macroeconomic and geopolitical issues. Amid the ongoing recessionary situation worldwide, organizations are most likely to prefer to retain cash and lower their spendings. This does not bode well for the Security market’s prospects in the near term.
Elevated Operating Expenses to Hurt Profitability: To survive in the highly competitive IT security market, each player is continuously investing in broadening its capabilities. The players in the space are aggressively investing in research and development to enhance their product portfolio and boost their capabilities to provide a complete security solution to clients. Moreover, companies are investing heavily to enhance their sales and marketing capabilities, particularly by increasing their sales force. Therefore, elevated operating expenses to capture more market share are likely to dent margins in the near term.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #212, which places it among the bottom 16% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Despite the gloomy industry outlook, a few stocks are worth considering in the market. However, before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation.
Industry Underperforms the Sector & the S&P 500
The Zacks Security industry has underperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.
The industry has declined 13.9% during this period, while the S&P 500 and the broader sector have risen 5.9% and 10.9%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing price-to-sales ratio (P/S), which is a commonly-used multiple for valuing Security stocks, the industry is currently trading at 8.12, higher than the S&P 500’s 3.65 and the sector’s 4.15.
Over the last five years, the industry has traded as high as 18.26X and as low as 6.73X and recorded a median of 10.58X, as the charts below show.
Price-to-Sales Ratio (Industry vs. S&P 500)
Price-to-Sales Ratio (Industry vs. Sector)
2 Security Stocks to Keep a Close Eye On
Qualys: The company offers cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures, thus helping protect their IT systems and applications from cyberattacks.
Qualys is gaining from the surging demand for security and networking products amid the growing hybrid working trend. Accelerated digital transformations by organizations are also fueling the demand for the company’s cloud-based security solutions.
Currently, Qualys carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for 2023 earnings has been revised upward to $4.24 per share from $4.15 per share over the past 30 days. Qualys shares have fallen 3.7% in the past year.
Price and Consensus: QLYS
Absolute Software: It is engaged in the business of providing firmware-persistent endpoint security and management solutions. The company provides solutions for the computer security monitoring and endpoint management industry. Absolute Software currently carries a Zacks Rank #3.
Absolute Software is benefiting from the rising demand for cyber-security solutions due to a slew of data breaches and a rise in demand for security and networking products amid the growing hybrid working trend. The continued digital transformation and cloud migration strategies adopted by organizations are key growth drivers.
The consensus mark for Absolute Software’s fiscal 2023 earnings has remained unchanged at 34 cents per share over the past 60 days. Shares of ABST have declined 8.6% over the past year.
Price Performance: ABST
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Qualys, Inc. (QLYS) : Free Stock Analysis Report
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