SunTust: 3 Cybersecurity Stocks to Watch Ahead of Earnings


Stock traders seeking the ‘hot investment’ now are of course going to be drawn toward tech and networking stocks. In this ‘Age of Coronavirus, when offices are turning to remote work by the score, and millions of workers are making the switch to telecommuting, companies in involved in networking, WiFi, and remote access technologies will have a clear path forward to success.

These are the headwinds behind the cybersecurity sector. Writing from SunTrust, 5-star analyst Joel Fishbein finds plenty of reason for investors to feel bullish toward cybersecurity stocks. He writes, “We continue to … believe that their [cybersecurity’s] heavily recurring revenue-based business models and essential place in the IT stack have insulated them from the most dire effects of the downturn so far.”

Writing on the sector just days ahead of the scheduled earnings reports, Fishbein is no Pollyanna: he does point out potential weaknesses in the sector. Specifically, he notes that while cybersecurity companies may have a strong business model and a secure niche, their customers are not necessarily so well blessed. Still, he sees two main points that favor investment in cybersecurity.

First, many of these companies have actually seen an increase in demand-for-services during the coronavirus downturn. The sudden move to a remote workforce has put a premium on network security. And second, he sees the sales cycle lengthening in this sector, as customers enter longer, larger contracts.

With those points in mind, Fishbein has selected several prominent cybersecurity companies likely to meet or beat their earnings forecasts. We’ve used the TipRanks database to take a closer look at three of Fishbein’s recent Buy ratings. Here are the results.

Proofpoint, Inc. (PFPT)

Proofpoint, which provides solutions for secure business email, archiving, inbound security, and data loss prevention, is a well-known success story from Silicon Valley. The company has built its business around a known weak spot in digital security – the flow of electronic messages into and out of a system – and parlayed that into $6.8 billion company bringing in over $880 million in annual revenue.

Like many of the tech world’s leaders, PFPT operates with a regular net loss. But those losses were starting to mitigate before the COVID-19 epidemic. Q4, despite missing the forecast by 1 cent and showing a 10-cent per share loss, was in fact quite successful. The quarterly loss improved by an impressive 50% year-over-year, and an even more impressive 68% sequentially. As 2020 started, Proofpoint was looking good: the company’s Q4 revenues had gained 23% yoy to reach $243.4 million, and the PFPT and showed share price gains in January and early February.

The stock took a heavy hit when the bear market began. Looking forward, the magnitude of the calendar Q1 hit is apparent: PFPT is expected to show a net quarterly earnings loss of 39 cents. The rocky quarter and the economic shutdowns pushed the stock value down 27% when the market slide began. It has made gains in volatile trading since then, and the stock’s total share price loss in the bear market is now less than 5%, making PFPT an relative outperformer compared to the S&P 500’s 16% net loss.

Fishbein says of this company, “We like Proofpoint’s core business and expanding platform of emerging revenue segments which help create multi-year visibility. With 95% recurring revenue and strong cash flow generation, we believe Proofpoint should be defensible in the current market environment. The rapidly changing threat landscape and the ongoing transition to the cloud continue to be dual long-term catalysts that are helping to drive demand for Proofpoint’s full suite of security and compliance solutions…”

He adds another point, an interesting one that highlights the unpredictability of Black Swan events like the coronavirus epidemic – and the way that companies may find unanticipated gains. Fishbein writes, “Recent reports have shown an uptick in spear phishing attacks preying on heightened fears around COVID19, which underscore the necessity of Proofpoint’s product suite…”

In this latest note on the stock, Fishbein updates to a Buy on PFPT, and his $135 price target does indicate room for a 14% upside potential in the next 12 months. (To watch Fishbein’s track record, click here)

Overall, Proofpoint also gets a bullish rating from Wall Street generally. The analyst consensus here is a Strong Buy, based on 7 Buys versus just two Holds. At $131, the average price target suggests an 11% upside from the $118 current share price. (See Proofpoint stock analysis on TipRanks)

Palo Alto Networks (PANW)

The second stock on our list is another resident of Silicon Valley. Palo Alto Networks takes its name from its hometown, and has made its reputation offering protection systems from malware attacks. PANW’s advanced firewalls are designed to secure cloud computing systems, making them essential is today’s business environment.

Back in February, PANW reported a mixed Q2, with earnings beating the forecast by 6.3% despite dropping year-over-year, and revenue missing the forecast by 3.1% while growing 14% yoy. The company had the bad luck to report the results just as the bear market started – PANW is still down 22% from its February peak, even though it has rebounded considerably since bottoming out on March 18. The stock is now trending up, but there is no denying that PANW has underperformed in the last several weeks.

Fishbein’s stance on PANW is unabashedly bullish, even as the company predicts a net earnings loss for fiscal Q3 (covering much of calendar Q1). He writes, “In our opinion, the worst is behind PANW as it has de-risked its forward looking guidance and undertakes a transition to a more subscription-based model… The company’s Prisma suite of products continues to gain traction according to our conversations with customers… We are believers in the long-term story of Palo Alto as it has evolved into an end-to-end security platform and is one of the best-positioned in the vendor space… In this short time-period since the outbreak of COVID-19 in the United States the company has seen … substantial wins. The majority of this pipeline is from its installed base, speaking to its strength.”

In line with his optimistic outlook, and his view that PANW’s recent share declines have simply made the stock more affordable, Fishbein rates the shares a Buy. He has raised his price target from $180 to $220, suggesting an upside potential of 14% this year.

Wall Street is a bit more cautious on PANW than Fishbein would allow. The 30 analyst reviews break down to 19 Buys and 11 Holds, making the analyst consensus a Moderate Buy. At $192.09, the average price target of $220.74 implies an upside of 15%. (See Palo Alto stock analysis at TipRanks)

SailPoint Technologies Holdings (SAIL)

The final stock on our list, SailPoint, provides solutions for cloud system access management. The cloud is an amazing software development, allowing for streamlined function and great flexibility, but access is a natural weak point. SAIL’s solutions allow for access certifications, insights, and modeling, along with file access management, password management, and cloud governance. Anyone who has worked on a cloud system knows how important it is to track who has access and who goes in and out – that is what SailPoint does.

They do it well, too, and that has brought the company steadily rising earnings in 2019. The company saw a net loss in 1H19 turn to net profits in 2H19, with Q4 beating the forecasts – and Q3’s results – by wide margins. EPS was reported at 11 cents, compared to the 2-cent estimates. Total revenue for Q4 was $89 million, up from $80 the year before, and full-year 2019 revenue topped $288 million, for 16% yoy growth.

Looking forward, however, the company sees a rocky path due to the coronavirus economic disruptions. Revenue is expected to drop to $70.4 million, while EPS is expected to revert to a net loss. This will be considered in-line with general industry performance so far this quarter; everyone is hurting from the coronavirus.

SunTrust’s Fishbein acknowledges this danger, writing, “Our conversations with customers indicate that the company could face some disruption as a result of the COVID-19 Crisis as larger deals could be pushed out.”

However, he also sees several mitigating factors, and adds, “We believe a change in their go-to-market motion will increase the percentage of SaaS revenue, accelerate SaaS bookings, and drive over 50% of revenue to subscription in the coming year.”

Overall Fishbein sees reason to buy into SAIL shares, and rates the stock accordingly. Reacting to the current business conditions, he does lower the price target to $25, but that still suggests a 12-month upside of 45%.

SAIL is the least expensive stock on this list, currently trading at just $18.11 per share. The average price target stands at $22.86, and indicates a possible 35% growth in the coming year. The Wall Street analyst corps is more divided on this stock; the 11 reviews break down to 6 Buy, 4 Hold, and 1 Sell, making the consensus view a Moderate Buy. (See SailPoint stock analysis on TipRanks)

To find good ideas for cybersecurity stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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