Cybersecurity in 2017
Tech investors tend to be optimistic (and sometimes naive) about the world. They see sunshine and rainbows in dark and dangerous places, which is both their greatest strength and their greatest weakness.
Positivity is an essential ingredient for building the future, but it can also be blinding. That’s where the top cybersecurity stocks for 2017 come into play.
If you look across the entire tech industry, there is one thing in common: security breaches. Every company has suffered some kind of cyberattack, yet they remain ignorant about cybersecurity basics. They are slow to invest in digital threat protection, which in turn has hurt the best cybersecurity stocks. In other words, tech utopians aren’t always right.
There have been hacks of various sizes and impacts:
• Yahoo! Inc. (NASDAQ:YHOO) was hit so hard that one billion accounts were compromised. This affected its potential sale to Verizon Communications Inc. (NYSE:VZ). More on this later. (Source: “Yahoo says one billion accounts exposed in newly discovered security breach,” Reuters, December 15, 2016.)
• Apple Inc. (NASDAQ:AAPL) only suffered a mild attack through one of its third-party developers, but that was more disturbing in some ways. It showed that vulnerabilities exist down the entire supply chain.
• Adobe Systems Incorporated (NASDAQ:ADBE) disclosed a massive data breach that occurred in September 2013. Hackers stole credit card and debit information from 3.1 million premium accounts. (Source: “Adobe Breach Impacted At Least 38 Million Users,” Krebs on Security, October 29, 2013.)
These examples were taken at random, but there are countless more that occur every day. Banks, government, and media institutions are hacked all the time, yet most people don’t want to pay for protection. They don’t take seriously the idea that someone can steal information, because it seems vague and distant. Getting hacked isn’t a real problem until it actually happens.
Only then does cybersecurity move up the priority scale. That’s where cybersecurity stocks come into play.
People start to pay attention when identity, money, or corporate secrets are stolen. These kind of hacks are the dark side of technology and innovation. Everyone wants to sweep them under the rug because … well, why would you want to face the ugly truth?
But sooner or later, people are going to react. Demand for cybersecurity services and products will start to creep skyward before eventually taking flight, lifting cybersecurity stocks. A “tipping point” will occur as surely as the New York Knicks will fail to make the playoffs, but it’s the “when” that matters.
I have developed a rule of thumb for determining these “tipping points.”
The demand for a technology will skyrocket when its cost is less than the perceived cost of not having it.
Don’t panic if that sounds confusing. What I’m trying to say is that cyberattacks are expensive for the company that’s been hacked. It may have to compensate customers, pay for a lengthy investigation, or lose future business. Those costs can seriously damage its financials.
If enough companies are hacked, other firms might start to wonder, “How much might we be out of pocket if someone hacks us?” Of course, they can’t know for sure until it happens, but they can run different types of analyses. If the number they get is higher than the cost of cybersecurity, they would be fools not to pay for the protection up front.
Based on some recent attacks, we estimate that this “tipping point” is drawing near. Most notably, Yahoo’s sale to Verizon was held up because the online giant disclosed two massive data breaches. There were over a billion accounts that were exposed, and no one knew about it! Not Verizon, not investors, not regulators.
The original deal said that Verizon would pay $4.8 billion for Yahoo’s online assets. It took Yahoo! CEO Marissa Mayer forever and a day to negotiate this deal, but now it’s hanging by a thread. Verizon is “re-evaluating” the deal. Translation: We want a discount because of the data breaches. (Source: Reuters, op cit.)
Yahoo is powerless in this scenario. Mayer lost all her leverage by not having enough cybersecurity, and it’s going to hurt a lot of people. For instance:
- It hurts her compensation package, because that is tied to the sale price.
- It hurts Yahoo shareholders that stuck through the last few years.
- And it hurts Yahoo employees with stock options.
All because she didn’t invest enough in digital threat protection. My guess is that other Fortune 500 CEOs watched this and thought, “Wow, I do not want to be in her position…” That’s where it starts, the snowball effect which leads to a tipping point.
3 Top Cybersecurity Stocks for 2017
The best cybersecurity stocks are currently trading at a discount, which should make them more attractive to tech investors. However, most people are reluctant to invest in cybersecurity stocks during a bear market. I understand why. It’s a human impulse to join the crowd as share prices climb through the roof, but that’s not how successful investing works.
“Buy low, sell high,” is perhaps the oldest cliché in finance, yet it remains one of the most difficult to put into practice. You don’t want the top cybersecurity stocks for 2017 after they’ve priced in all their gains; you want them straight out of the bargain bin.
Before we dive into the specifics of three of our top cybersecurity stocks for 2017, here’s a quick look at our top five cybersecurity stocks list.
1. Top Cybersecurity Stocks for 2017: FireEye Inc (NASDAQ:FEYE)
Since the Donald Trump administration is looking to fortify America’s cybersecurity, I looked to the Department of Homeland Security’s list of “certified technology providers.” Many of these companies are going to benefit from the splurge in national defense spending.
Not only is FireEye Inc (NASDAQ:FEYE) on that list, but its share price is also trading at a massive discount.
Investors aren’t too happy with the company’s performance last year. Revenues continued to rise, just not as quickly as the market had hoped. At the same time, costs spiralled out of control, and there was a management shuffle. No wonder the share price is down 9.28% over the last 52 weeks.
But take a closer look at FEYE stock. Instead of looking at a snapshot of its financials, check out the direction over time. What you’ll see are improving operating margins, growth in FireEye’s subscription and services, and strong leadership.
Kevin Mandia, the new CEO, is a high-powered figure in the cybersecurity world. But more to the point, his cost-cutting measures are clearly having an effect on the firm’s operational efficiency. In fact, I’m hoping to see FireEye turn an operating profit in the next few quarters.
My guess is that it would be a game-changer for the stock.
The market loves a good turnaround story, so it would gladly hop on the bandwagon if FireEye can slim its cost base. There is certainly more risk in owning FEYE stock than some of the others on our cybersecurity stocks list, but there’s also more upside.
Make no mistake about it, FireEye stock could be a surprise winner of 2017.
2. Top Cybersecurity Stocks for 2017: Cyberark Software Ltd (NASDAQ:CYBR)
Movies are incredibly wrong about cybersecurity basics. They imagine some genius sitting in front of computer, bespectacled and unathletic, slamming away at a keyboard until he/she breaks into a secure facility. According to movies, it all happens in a flash. (Tap tap tap, “I’m in!”)
Real life hacking doesn’t work that way. According to Professor Micah Sherr of Georgetown University, cyberattacks can take months of planning.
(Source: “How Are Hackers Portrayed in Pop Culture?,” Georgetown University Youtube channel, August 18, 2016.)
Hackers study the system’s defenses, probe for vulnerabilities, and eventually launch an attack. In other words, they do their homework. Here’s the surprising part: They most often target human error as the point of entry, because we are more likely than computers to make mistakes.
Protecting against this type of hacking is extremely hard. Luckily, there’s Cyberark Software Ltd (NASDAQ:CYBR), a specialist for insider threats. This Israeli-based firm helps guard against internal data breaches. I personally think the services it offers are essential to any corporation with more than 10 employees, and it seems like the market agrees with me.
Nearly half of the Fortune 100 companies are registered with Cyberark. This shows that big business understands how useful its services are, but small- and medium-size companies have yet to catch on. Once they do, Cyberark’s profits are going to shoot through the roof.
Considering that the share price advanced 45% in the last year, the trading window on this stock appears to be closing. I would move quickly to capitalize on its potential.
3. Top Cybersecurity Stocks for 2017: Symantec Corporation (NASDAQ:SYMC)
Symantec Corporation (NASDAQ:SYMC) is probably the biggest and most well known company on our cybersecurity stocks list. Its marquee product, “Norton Antivirus,” is extremely popular with consumers. As a result, some analysts tend to reduce Symantec’s outlook to the outlook of Norton, which is, of course, a ridiculous way to value the company.
Whatever criticisms can be made of Symantec, and there are a few, this isn’t one of them. You cannot make the case that Symantec relies on just one product. In fact, Symantec plans to be an “end-to-end” provider of digital security, across platforms and devices. It has made the right acquisitions to bring this dream into reality, so there’s no reason to doubt its seriousness.
Of course, it’s possible to argue that consumers won’t pay to protect their information. That is a reasonable position to hold, if you don’t mind being wrong.
Remember my rule of thumb: “The demand for a technology will skyrocket when its cost is less than the perceived cost of not having it.” This statement is just as true for individuals as it is for businesses.
Think about it: if three or four of your closest family members had their credit card information stolen in the same week, wouldn’t you start to consider some digital protection? That may be an extreme example, but it was meant to prove a point. Eventually the cost of not doing something can overwhelm your reluctance to pay for a relatively cheap service.
Moreover, Symantec stock advanced nearly 47% in the past 52 weeks.
It was able to achieve this despite falling computer sales and poor economic conditions, largely because of the end-to-end privacy plan. Investors should keep a close eye on SYMC, because it’s almost certainly one of the top cybersecurity stocks for 2017.
Conclusion on Cybersecurity Stocks
All of the companies on our top cybersecurity stocks list could skyrocket this year. Part of their strength is drawn from individual tailwinds, but there are also broad reasons to invest in cybersecurity stocks. Namely, that more and more of our information is getting stored on the cloud.
This is true for both businesses and individuals.
With every passing day, we have more to lose from a cyberattack. Therefore, it only makes sense that we pay a small fee in order to protect our digital assets. Market forces will concentrate these fees toward the best cybersecurity stocks, which in turn drives up their share prices.
In other words, the bullish case for cybersecurity is air-tight.