Technology

3 Buy-Rated Security Software Stocks to Own for the Rest of 2018

Lee Jackson

Published: June 5, 2018 9:45 am

Last Updated: January 11, 2020 10:46 pm

Despite the seemingly never-ending number of security breaches and hacks at everything from major corporations to government bureaus and departments to even the military, spending in the security software sector looks poised to have the best year in 2018 since 2015. Five years ago, the sector was red hot, and the number of initial public offerings at the time skyrocketed, but a lot of that enthusiasm went away as earnings and growth slowed dramatically.

In a new research report from the security software analysts at Deutsche Bank, while they are positive on the potential for the rest of 2018, they remain cautious and continue to keep an eye on valuations. The report noted this:

Sentiment remains mostly positive in the security software space although we have been hearing some concerns on a couple of different fronts. First, we heard skepticism on the firewall sector and the potential for product growth to stabilize in 2018 for appliance centric vendors in general. On the opposite end of the spectrum, investors noted some concerns on high growth names stating that the bull case is already well known for some companies.

Three stocks remain the top Buys at Deutsche Bank, and all are good additions for aggressive growth portfolios.

Palo Alto Networks

This stock was a momentum trader’s dream before crashing back to earth. Palo Alto Networks Inc. (NASDAQ: PANW) is helping to lead a new era in cybersecurity by protecting thousands of enterprise, government and service provider networks from cyber threats. Unlike fragmented legacy products, its security platform safely enables business operations and delivers protection based on what matters most in today’s dynamic computing environments: applications, users and content.

Palo Alto Networks security platform has new features that were introduced to help security professionals overcome the distractions and time spent on problems caused by the overwhelming volume of alerts and manual processes associated with operating many discrete security products and, instead, expand breach prevention capabilities and boost operational efficiency.

The analysts noted this in the report, as the company had big news to report recently:

We had originally written something a little bit different in our weekly report on the company but all that changed last Friday evening. To start, we were most surprised by the announcement that Nikesh Arora (former COO of SoftBank and CBO at Google) would be replacing Mark McLaughlin as CEO and Chairman. While we normally do not like C-level changes – feedback on Arora from our internet team was very positive. Thus, we think the quality of his background should offset the normal negativity associated with unexpected changes at the CEO level. In addition, we were pleased by the numbers Palo Alto pre-announced that likely exceeded even the highest of expectations. And lastly, we are coming away with a higher level of confidence in the longevity of the company’s product revenue growth profile. All in, we continue to feel good on the stock.

The Deutsche Bank price target for the shares is $240, and the Wall Street consensus price objective is $205.09. The shares were trading early Tuesday at $207.25 apiece.

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Proofpoint

This company has long been mentioned as a potential takeover candidate and is also a top pick at Deutsche Bank. Proofpoint Inc. (NASDAQ: PFPT) provides threat protection, incident response, regulatory compliance, archiving, governance, eDiscovery and secure communication solutions worldwide. Its security-as-a-service solutions comprise an integrated suite of on-demand data protection solutions that enable large and midsized organizations to defend, protect, archive and govern their sensitive data.

The company provides Proofpoint Enterprise Protection, a communications and collaboration security suite designed to protect customers’ mission-critical messaging infrastructure from outside threats, including spam, phishing, unpredictable email volumes, malware and other forms of objectionable or dangerous content before they reach the enterprise.

E-mail protection remains a top priority for many companies, and this is a distinct positive for Proofpoint. The company recently entered into definitive agreement to acquire Cloudmark for $110 million in cash, which strengthens its industry-leading investment in messaging security and threat intelligence.

Deutsche Bank has set its price target at $140, and the posted consensus target is $137.30 a share. The stock opened trading Monday at about $121.00 per share.

Okta

While probably not a household name, this company could be a target of private equity. Okta Inc. (NASDAQ: OKTA) is an independent provider of identity for the enterprise. Its Okta Identity Cloud platform provides identity management solutions that enable customers to secure their users and connect them to technology and applications. It also connects enterprises to their customers, employees, contractors and partners.

The product allows users to access a range of cloud applications, websites, mobile applications and service from various devices. Its platform is used by information technology (IT) organizations to secure their enterprise and by developers to build customer-facing websites and applications.

Okta Identity Cloud consists of a suite of products to manage and secure identities. It offers a range of products, such as Adaptive Multi-Factor Authentication, Universal Directory, Lifecycle Management products, Single Sign-On, application program interface (API) Access Management and Mobility Management.

The analysts like the stock but are cautious, and said why in the report:

Sentiment on the company has shifted from positive to very positive over the last month. We continue to pick up encouraging commentary in our fieldwork on the identity space and our channel checks on OKTA have been strong. That said, we fully admit that it is difficult to completely explain the 30% move the stock has seen over the last month. As a result, it is hard to pinpoint what exactly is needed to drive the stock higher on the earnings report on Wednesday June 6th. While the stock could easily pull back after recent gains, we continue to like the long term growth story. We expect a solid beat on first quarter revenue and billings and a modest increase to Fiscal 2019 guidance – consistent with the pace of past quarters.

The $56 Deutsche Bank price target for the shares compares with the consensus target last seen at $47.60 and the recent share price of $56.25.

While the whirlwind around the top stocks in the sector has really slowed from the 2013 to 2015 pace, the need is increasing every year sequentially, and the huge Equifax breach made that even more evident. These top companies offer investors solid ways to play the sector in a multitude of areas, and growth could return in the second half of 2018.