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Cybersecurity Stocks To Buy As Covid-19 And Remote Work Speed Shift To Cloud

You may think the time is right to move into cybersecurity stocks, if you’re reading this IBD investing primer.

Amid the rapid global spread of the coronavirus called Covid-19, many companies instructed employees to work from home. That has increased demand for computer security products that support remote work.

The coronavirus emergency and shift to remote work has accelerated the growth of cloud-based network security. So the industry now has a new term for the infrastructure that supports distributed workers and branch offices.

It’s spelled SASE — pronounced “sassy” — and it stands for Secure Access Service Edge.

Fortinet (FTNT) ranks No. 28 in the  IBD 50 roster of fast-growing companies.  However. Palo Alto Networks (PANW) has dropped out of the listing. Palo Alto has been on an acquisition spree. It aims to build a cloud-based security platform.  Palo Alto recently acquired the Crypsis Group.

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Cybersecurity Stocks: Relative Strength Ratings

Also, one key IBD technical measure for cybersecurity stocks are Relative Strength Ratings.

Zscaler (ZS), CrowdStrike Holdings (CRWD), SailPoint Technology (SAIL) and Okta (OKTA) hold the highest RS Ratings of cybersecurity stocks.

Zscaler stock has neared an entry point.

According to IBD Stock Checkup,  Zscaler (ZS) holds a RS Rating of 97 out of a possible 99. Zscaler is the biggest provider of cloud-based web security gateways that inspect customers’ data traffic for malware.

CrowdStrike uses machine learning and a specialized database to detect malware on laptops, mobile phones and other devices that access corporate networks. Many software companies are using artificial intelligence to get a competitive edge.

At its recent Fal.Con 2020 virtual user conference, CrowdStrike announced plans to expand from endpoint security into protecting cloud workloads.

SailPoint, an identity management software maker, reported adjusted earnings of 15 cents, swinging to a profit from a 1-cent loss a year earlier. Revenue jumped 47% to $92.5 million.

Coronavirus Shakes Up Cybersecurity

As remote workers access company data via the internet, many businesses are setting up virtual private networks, or VPNs. Some are buying laptops with preinstalled security software.

“We believe corporations are facing challenges in terms of VPN capacity, and protecting workers adequately with next-generation network and endpoint security offerings,” William Blair analyst Jonathan Ho said in a report to clients.

He added that “intensifying email and phishing campaigns, identity access management, and control over software applications” are other security issues.

However, some companies have cut back on technology spending amid a weakening economy.

Further, industries hard hit by the coronavirus pandemic will spend less on security software in 2020. They include airlines, hotels, retail and restaurants.

Meanwhile, worldwide security spending is expected to grow 2.4% to reach $123.8 billion in 2020, said research firm Gartner in an updated June forecast. Its pre-coronavirus December forecast called for 8.7% growth.

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Cybersecurity Stocks: More M&A On The Way?

Cloud security will boom 33% to $585 million in 2020, Gartner said. One view is that mergers and acquisitions will pick up.

“The cloud has disrupted everything, which presents both threat and opportunity,” Jefferies analyst Brent Thill said in his recent report. “The cyber market is riper than ever for ongoing consolidation. Many smaller vendors are attempting to solve the same problems, larger vendors are looking to create security suites, and financing rates are at all-time lows.”

Zscaler, Qualys and Ping Identity Holdings (PING) were each featured recently as the IBD Stock of the Day. Qualys sells security vulnerability management services.

In addition, while cybersecurity stocks often get a boost from well-publicized cyberattacks, the impact can be short-lived.

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Corporate America has hiked tech spending on security aiming to protect intellectual property as well as consumer privacy. Hackers continue to steal credit card data and intellectual property.

Further, extortion is on the rise. Hackers are increasingly using ransomware. They demand payments to let companies regain access to their own information.

Food-delivery service DoorDash said in September that a security breach exposed the personal data of about 4.9 million customers, merchants and delivery workers.

Privately held DoorDash joined Quest Diagnostics (DGX), Marriott International (MAR), Equifax, Yahoo, Anthem (ANTM), Target (TGT) and others as tech security casualties.

Cloud Computing One Key Trend For Cybersecurity Stocks

Spending on security technologies has evolved as companies shift business workloads to cloud computing service providers. Amazon Web Services, part of Amazon.com (AMZN), is the biggest cloud services firm. Amazon looms as a potential rival as it builds more security tools into its cloud services.

In addition, Microsoft (MSFT) is integrating more security tools into its cloud-based Office 365 software. Microsoft competes with cybersecurity firms such as Proofpoint (PFPT), Splunk (SPLK), CrowdStrike, Okta, and startup Netskope.

“As workloads and compute instances grow, the security paradigm shifts from a traditional data center architecture to cloud-delivered services,” said a recent Bank of America note. “We believe the shift to cloud and software-as-a-service security continues and potentially accelerates in 2020.”

Also, Fortinet competes with Palo Alto Networks and others in the firewall security market. Firewalls reside between private networks and the internet. They block unauthorized traffic and check web applications for malware.

As large companies shift to off-premise cloud computing services, one view is that firewall technology will play a lesser role. Fortinet has targeted software-defined wide area networks, or SD-WANs, an emerging computer networking technology.

Aiming to catch-up in SD-WAN technology, Palo Alto Networks recently acquired startup CloudGenix. Palo Alto Networks aims to build a broad cloud-based security platform through acquisitions.

Meanwhile, analysts say Netskope and Menlo Security are among cloud security startups that could launch initial public offerings. Analysts say a new wave of startups seems to be taking share from industry incumbents. They include Illumio, SentinelOne, Cybereason, Exabeam and iBoss.

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Cybersecurity Products Battle Ransomware, Phishing

Cybersecurity stocks span a wide-range of products and services. In addition, some security vendors are shifting to software-based subscription business models from selling hardware appliances.

Further, it behooves an investor to know which cybersecurity stocks address ransomware, phishing or other kinds of cyberattacks. Proofpoint specializes in email and data-loss protection.

Cloud vendors include Okta, Mimecast (MIME) and Rapid7 (RPD).

Hackers often aim to compromise networks by targeting employees or management who have administrative access. CyberArk Software (CYBR) manages privileged accounts. In addition, Okta provides identity management services.

To slow down hackers, more companies are focusing on internal security threats though a strategy known as Zero Trust.

Traditional security measures aim to keep the bad guys out of corporate networks. Network firewalls focus on intruders from the public internet.

Zero Trust cybersecurity models focus on internal threats, such as hackers stealing someone’s security credentials. Security firms verify the identity of network users and limit access to applications.

CrowdStrike, Okta, Netskope and Proofpoint recently formed a Zero Trust alliance.

Targeting Zero Trust security, Cisco Systems (CSCO) in 2018 acquired Duo Security for $2.35 billion.

Artificial Intelligence Changing Cybersecurity Market

Also, many fast-growing cybersecurity firms are in the endpoint market. Their tools detect malware on laptops, mobile phones and other devices that access corporate networks.

Further, CrowdStrike’s initial public offering in June raised $612 million, one of the largest cybersecurity offerings. CrowdStrike’s rivals include VMware‘s (VMW) Carbon Black, Palo Alto, FireEye (FEYE) and startup Cybereason.

In addition, state-sponsored hackers and cybersecurity firms are both using artificial intelligence to get an edge.

Artificial intelligence should improve computer security tools by speeding up incident responses. It could help thwart email-delivered ransomware or swarming botnets that knock out access to websites.

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