Equifax Hack Proves Cybersecurity Bulls Right…Again

Equifax Stock
iStock.com/Kwun Kau Tam

What Is the Equifax Hack?

Last week, Equifax Inc. (NYSE:EFX) revealed that it suffered a cyberattack.

But this wasn’t your run-of-the-mill cyberattack—it was a HUGELY destructive attack that left 143 million accounts vulnerable. Almost every American was impacted, or at least every American with a credit card.

And the hackers escaped with a treasure trove of highly sensitive data.

All the information that Equifax collects while analyzing credit scores—names, dates of birth, social security numbers— was exposed.

It’s probably on the dark web right now, selling to the highest bidder.

From Equifax’s perspective, this is a calamity of biblical proportions. But there’s a silver lining for investors: the Equifax hack proves that cybersecurity bulls are right—everyone needs protection on the Internet.

This has been the investment thesis for cybersecurity stocks all along. Just consider the following facts:

  1. The Internet is a digital Wild West.
  2. More economic activity is online than ever before.
  3. Digital assets need protecting, just like economic assets in the real world.
  4. People will only pay for protection once fear of cyberattacks reaches a critical mass.
  5. Investors that buy before the industry reaches critical mass will make the biggest gains.

We are almost at that critical mass, dear reader.

With a growing number of hacks aimed at major corporations, such as Yahoo! Inc. (owned by Verizon Communications Inc. (NYSE:VZ)), Sony Corp (ADR) (NYSE:SNE), Target Corporation (NYSE:TGT), Home Depot Inc (NYSE:HD), and JPMorgan Chase & Co. (NYSE:JPM), businesses are waking up to the dangers of cyberattacks.

But large multinationals aren’t the only targets.

Remember the “WannaCry” hack from earlier in 2017? It held hostage 300,000 computers from across the world. Individuals, small businesses, big businesses—they were all held up for ransom because everyone is fair game to hackers.

Also ReadThree Top Cybersecurity Stocks for 2017

Corporate decision makers must realize that everybody is in the crosshairs of hackers, and that the only solution is to enlist a professional cybersecurity team.

PANW Stock: A Potential Winner Among Cybersecurity Stocks

With the Equifax hack fresh in our minds, it’s a good time to consider which cybersecurity stocks are best positioned for the coming storms. Here is one of the possible contenders.

Palo Alto Networks Inc

The firewall technologies designed by Palo Alto Networks Inc (NYSE:PANW) are catching on, making it a potential gold mine for cybersecurity investors.

For example, Palo Alto had more than 39,500 customers at the end of the third quarter of 2017. Since then, the California-based company landed an approximate 3,000 additional customers, bringing its total to over 42,500. (Source: “PALO ALTO NETWORKS REPORTS FISCAL FOURTH QUARTER AND FISCAL YEAR 2017 FINANCIAL RESULTS,” Palo Alto Networks Inc, August 31, 2017.)

You can see the difference pretty clearly on its income statement.

Palo Alto’s revenues showed a 27% increase from the same quarter in 2016. In the next-to-last quarter, there was a 25% gain from the year before. What does that tell us? It tells us that Palo Alto is no stranger to double-digit growth.

However, the company’s bottom line isn’t as pretty. It is in the hole for $38.2 million, up slightly from $31.4 million last year. But, since expenses are growing slower than revenues, the overall portrait of PANW stock is still flattering.

Here’s the best part: Palo Alto stock is trading cheap.

Its performance over the last five years is roughly equal to the NASDAQ 100, yet that was not true circa 2015. In that year, cybersecurity stocks were flying. Then investor expectations collapsed.

Take a look for yourself.

Palo Alto stock chart

Chart courtesy of StockCharts.com

At the start of 2015, analysts wrote glowing recommendations for cybersecurity stocks, citing their “legitimately growing businesses” and saying their stock prices “could head higher for a long time.” (Source: “You got hacked. Cybersecurity stocks soar,” CNNMoney, February 27, 2015.)

One year later, investors were singing a very different tune. None went so far as to claim that cybersecurity was unnecessary, but there was a noticeable drop-off in coverage of cybersecurity stocks.

Meanwhile, the share prices of cybersecurity stocks lagged behind the broader market until any previous optimism was negated. In effect, investors stopped pricing the industry on its long-term potential because the short term had become so disappointing.

This is a foolish way to think about investing. Warren Buffett always says to “buy stocks you don’t mind holding for a lifetime” because time horizons are less important than most people think.

For example, let’s say a friend wants to give you a free set of golf clubs. He promises to swing by at 7:30 p.m., but instead shows up at 10:00 p.m. There’s no question he was late, but does that diminish the transaction? Of course not!

You still gained a free set of golf clubs, though it cost you a little more time.

Likewise, cybersecurity stocks need a little more time. A critical mass of fear is needed for corporate America to dedicate part of their annual budgets towards cyber defense.

We are fast approaching that point, but many investors have locked the door and gone to sleep. “Free golf clubs be damned!” is what they’re saying by abandoning this industry.

However, their folly creates a nice little opportunity for risk-capital investors to make triple-digit gains.

Analyst Take: 

Analysts agree that cybersecurity is needed for Internet infrastructure. It is critical—that much is settled. But, despite this faith in the industry, it’s hard to find an analyst that’s 100% bullish on cybersecurity stocks. I call that an “expectations deficit.”

Investors can take advantage of expectations deficits by using a simple buy-and-hold strategy.

This isn’t rocket science. It is as simple as knowing there is a mountain and that it will come to you if you wait long enough.

As such, I maintain a $300.00 price prediction on PANW stock, with a window of 12 to 18 months.