Outlook on Cybersecurity Stocks

Global enterprise expenditures on cybersecurity are predicted to be over $1 trillion from 2017 to 2021, primarily because of the increase in the number of cyberattacks. Tech Republic reported that 49% of businesses were hit with cyber ransom attacks in 2016.

Then of course, there’s the hack of the DNC, along with the fiasco at Yahoo, where the passwords and information of 1 billion people were obtained by hackers. In the latter situation, consumers are confronted by the looming specter of personal financial ruin. Cybersecurity expert Areyo Dadar offers a survival guide for consumers. He explained that the average loss for consumers in such instances is $7000.

The Internet of Things (IoT) is adding to the security problem, as billions of interconnected devices become vulnerable to botnet attacks. Ransomware attacks target phones, business computers and laptops, and experts are now forecasting attacks on healthcare devices, along with permanent denial of service (PDoS) or “phlashing” attacks; TDoS, which terminates emergency communications, and attacks on transportation.

Essentially, it’s a mess.

The big players in cybersecurity are Cisco, IBM and Symantec, along with a host of smaller companies, such as Palo Alto Networks, FireEye Inc. and Fortinet Inc. Sixty percent of Palo Alto’s revenue comes from subscriptions. FireEye’s stock is more volatile, experiencing big gains and losses in 2016. What’s interesting about the smaller players is that all of them are ripe for acquisition, especially in the current climate. In essence, the cybersecurity market is deluged with smaller companies because of venture capital. So expect to see more acquisitions occur during 2017.

Recent acquisitions include: Cisco latched onto CloudLock in June 2016, while Symantec snapped up Blue Coat and LifeLock. When these acquisitions took place, the buyers were after cloud access security broker technology (CASB). CASB functions as a moderator between enterprises and external cloud applications. It’s all about securing the data. Right now, about 5% of enterprises use CASB, but industry experts expect that number to grow to 85% by 2020. The CASB market is rife with players: BitGlass, CiperCloud, NetSkope and Palerra, along with bigger players like IBM and SecureWorks.

As more enterprises switch to the cloud, security is a primary anxiety. Thus expenditures on cybersecurity will rise during 2017 into 2018. IDC asserts that cloud security accounts for 15% of enterprise security budgets. In 2018, cloud security will account for 33% of security budgets, with expenditures on cloud security increasing 19% per year into 2019. Government spending on cybersecurity is expected to increase under the new administration.

Citigroup’s analysts like Cisco and Palo Alto, while analysts at Morgan Stanley believe ProofPoint is “ahead of the curve.” AWS dominates the IaaS market, but so far has farmed out cybersecurity to third party providers. Still, AWS launched its own web-application firewall not long ago. So it will be interesting to see what AWS’s intentions are. Amazon AWS could develop their own cybersecurity applications, acquire one of the smaller players, or continue to count on third parties.

On Monday, the 9th of January, Barracuda Networks Inc. (CUDA) reported its third quarter earnings, exceeding analysts’ expectations. Earnings per share were $0.22, when analysts had predicted $0.14, and revenues increased from $80 million to $88 million, year over year.

Fundamental Investing published a great article about Palo Alto Networks a few days ago, stating, the company “looks set to benefit from the growth of the cybersecurity market in the long run.” Palo Alto’s market share is expected to increase, along with an upside that may rise 50% per year for the next three years.

It is not the intention of this article to examine each and every company’s performance; but the two examples above demonstrate that cybersecurity stocks appear to be headed for brighter days. Anyone looking for an excellent summary of the various companies should read Accendo Markets analysis.

Industry experts estimate that U.S. enterprises lose over $250 billion per year because of cyberattacks; by 2019, enterprise expenditures on cyber security is forecast to hit $46 billion. Thus, observers should look for more and more acquisitions to occur as the cyber security sector heats up.

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