Technology was a big 2020 winner, and many of the top software stocks had an outstanding year. One thing that continues to be critical for companies and governments is protecting data and keeping malicious hackers and malware from invading information technology systems and infrastructure.

In a recent report, the Security Software team at Raymond James resumes coverage on five top companies in the industry. Here we focus on the three that are rated Strong Buy and Outperform. The analysts note that enterprise information technology spending is becoming more strategic and less cyclical. IT spending has represented more than half of total equipment capital spending for three consecutive years, and in a display of durability, it has accelerated as a percentage of spending into the pandemic.
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The analysts said this cybersecurity software spending and growth:

Security is small, but increasingly important to Enterprise IT Spending. While Security spend has experienced rapid growth, it is still just ~4% of total IT Spending. However, we note that customer verticals such as Financial Services spend nearly 2x the broader global market as a percentage of budget. In other words, there are current tangible examples that suggest broader market adoption of these models could force a doubling of Security spend as a percentage of IT budgets over time.

While the Raymond James analysts are very positive on these three top companies, it remains important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Fortinet

The shares have backed up nicely from the highs of last year and are offering a very attractive entry point. Fortinet Inc. (NASDAQ: FTNT) secures the largest enterprise, service provider and government organizations around the world. It empowers its customers with complete visibility and control across the expanding attack surface and the power to take on ever-increasing performance requirements today and into the future.

Fortinet’s Security Fabric platform can address the most critical security challenges and protect data across the entire digital infrastructure, whether in networked, application, multi-cloud or edge environments. Fortinet ranks number one in the most security appliances shipped worldwide, and more than 465,000 customers trust Fortinet to protect their businesses. Both a technology company and a learning organization, the Fortinet Network Security Expert Training Institute has one of the largest and broadest cybersecurity training programs in the industry.

Raymond James said this about the company:

We think penetration of compute-intensive functions like SD-WAN provides significant runway (currently 12% of billings), and the technology gap is significant, which should lead to sustained organic growth. Recent transactions in SD-WAN serve as a near-term catalyst given tech leader Silver Peak is in the process of being acquired by HP Enterprise.

On profitability: We note that this growth should come alongside continued strong margin performance as Services revenue increases, and go-to market advantages remain as Fortinet continues to command significant channel mindshare based on our checks. This combination should continue to separate Fortinet from the pack, and investors will begin to view this through the lens of a “Rule of 40” software company. These stocks generally trade at >20x revenue and >40x EBITDA and we see valuation closing this gap over time.

The shares are rated Outperform and come with a $170 price objective. The consensus target is $139.50, Fortinet stock ended Wednesday at $138.11 per share.

This company is at the forefront of cybersecurity and has awesome growth potential. Ping Identity Holding Corp. (NYSE: PING) is a leader in identity access and management. Its products safeguard enterprise applications and data by providing controls around user authentication, access and more.
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Ping’s single-sign-on technology helps streamline user workflow by providing a single password for multiple applications to reduce log-ins. Additional product features include consumer identity management, Internet of Things and application programming interface management. Ping differentiates with a history of complex deployments across hybrid networks.

The analysts have a Strong Buy rating on the shares and said this:

We believe the combination of
1) favorable secular market trends that are in the early innings, but poised to accelerate.
2) Ping’s differentiated technology in both enterprise scale and burgeoning customer identity use cases.
3) proven ability to operate a profitable growth model make this an attractive asset at a reasonable price relative to the group.

Ping’s core solution is at the heart of one of the biggest trends in security software: The dissolving network perimeter, and security based on identity rather than physical location inside a corporate network perimeter. While demographic tailwinds were already favorable as the incremental workforce prefers work-from-anywhere – not inside corporate perimeter, and on any device – not just corporate-issued PCs, we think this trend only accelerates in a post-Covid world as the remaining workforce is becoming conditioned to this.

The Raymond James price target for the shares is $40, and the Wall Street consensus target is $35.73. The last trade on Wednesday for Ping stock was reported at $27.28.

Rapid7

Investors may not be familiar with this company, but its stock has solid upside potential to the analyst target. Rapid7 Inc. (NASDAQ: RPD) engages in the provision of cybersecurity analytics and automation services. Its product includes an insight platform that offers InsightVM, InsightIDR, InsightAppSec and InsightConnect.

Rapid7 is advancing security with visibility, analytics and automation delivered through its Insight cloud. Its solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks. Some 8,400 customers rely on Rapid7 technology, services and research to improve security outcomes and securely advance their organizations.

The analysts pointed this out:

We think Rapid7’s core vulnerability management market represents an important pillar to a holistic security strategy, based on our conversations with customers, and is essentially a three-horse race with Rapid7, Qualys, and Tenable owning more than half of the market. We think the industry structure can sustain over the intermediate term as moats widen alongside platform expansions. As vulnerability management continues to broaden its value proposition, we see growth in both share of wallet from existing customers, and opportunity to acquire new customers, supporting a growth rate in line with the overall security market in the high-single-digit range.

The stock is rated Outperform. The $70 Raymond James price target is similar to the $69.80 consensus target. Rapid7 stock closed most recently at $84.95, after falling almost 4% on Wednesday.

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While the whirlwind around the top cybersecurity stocks has slowed dramatically from the pace of four and five years ago, the need in corporate America is increasing every year. These top stocks offer investors solid ways to play the industry in a multitude of areas. Most importantly, with spending expected to increase in the space, those with the top technology will stay at the forefront.

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