Top Security-software stocks: Investors may want to be more selective with their picks this year

  • Top security stocks

Security-software stocks had a huge run in 2020. Investors may want to be more selective with their picks this year, wrote Goldman Sachs<> in a Friday note.

  • Goldman Sachs analyst Brian Essex noted that the average security stock he covers climbed 75% for the year, driven by a combination of the work-from-home trend, durable spending and companies’ adoption of software-as-a-service revenue models.

Brian Essex

In an in-depth Friday report on the outlook for the sector, Essex wrote that he sees fewer tailwinds in 2021, and suggested investors look for companies offering “underappreciated [business] model transitions, strategic catalysts, and revenue outperformance with improving fundamental support at a reasonable price.” He raised his price targets for many companies in the group, in part to reflect recent price appreciation.

Essex also argued that the “Sunburst” hack on SolarWinds will continue to support security software spending in 2021.

“2020 was the worst year on record for cyber threats,” he wrote. “Fueled in part by the pandemic, elections, and a sudden shift to remote working environments, this record had already been achieved by the end of the second quarter. As a result, security remained the priority of CIOs through the year.”

He added that as the fallout from the Sunburst attack continues to become clear, more enterprise victims are likely to emerge. “We also anticipate greater scrutiny over how vendors develop, distribute and maintain their software as the scope of security extends beyond vendors themselves to customers that rely on the integrity of their platforms,” he wrote.

Essex offered several themes to play in the group for 2021.

They include companies with business models in transition:

*   Ping Identity<> (PING): He raised his rating on the identity-management company to Buy from Neutral. “We view Ping as a stock overlooked during the 2020 rally and expect 2020 headwinds will become tailwinds in 2021,” he wrote. “Conversations with industry participants indicate favorable demand for the company, and our most recent CIO survey indicates improving spending intentions. Essex raised his price target to $34 per share, from $29.

*   Verint<Verint Systems Inc. Stock Price (VRNT) | Barron’s> (VRNT): He maintained his Buy rating on the cyberintelligence company. “Recent Q3 outperformance marked an inflection point to better performance ahead as management provided long-term guidance implying meaningful revenue re-acceleration and better profitability,” he wrote.
  • “Additionally, a planned business split could make the resulting entities more attractive for potential investors, yielding a potentially better sum-of-the parts valuation in the process.” He raised his target to $80 from $66.

Longer-term “winners that invested in growth”:

*   CrowdStrike<CrowdStrike Holdings Inc. Cl A Stock Price (CRWD) | Barron’s> (CRWD): This vendor has “the fastest growth in our coverage universe and some of the best unit economics as well,” he wrote. He raised his target to $240, from $186.

*   Tenable<> (TENB): The company is “well positioned to benefit from an elevated threat environment with favorable large enterprise and government exposure.” Target raised to $57, from $41.
*   Rapid7<Rapid7 Inc. Stock Price (RPD) | Barron’s> (RPD): This vulnerability assessment and management company is “expanding into adjacent markets and taking share upmarket with a comprehensive platform.” Target raised to $104, from $75.
*   SailPoint Technologies<SailPoint Technologies Holdings Inc. Stock Price (SAIL) | Barron’s> (SAIL): This “identity-governance vendor [has] potential for ongoing meaningful share gains as the company continues to transition toward a SaaS model.” Target raised to $61, from $53.

Core security plays with favorable product cycles:

*   Palo Alto Networks<Palo Alto Networks Inc. Stock Price (PANW) | Barron’s> (PANW): The company is “taking share from legacy vendors while investing in best of breed next generation security technology.” Target raised to $408, from $310.

*   Fortinet<Fortinet Inc. Stock Price (FTNT) | Barron’s> (FTNT): “A low cost vendor, taking share upmarket with multiple product cycles ahead.” Target raised to $169, from $152.

And companies whose shares are trading at a discount:

*   McAfee<McAfee Inc. Cl A Stock Price (MCFE) | Barron’s> (MCFE): “Although the stock has underperformed since its recent IPO, we see multiple levers for upside while the stock remains at a meaningful discount.” Essex rates the company at Buy, with a $26 price target.

Essex has Sell ratings on a couple of firms in the sector as well:

*   SecureWorks<> (SCWX): He cut his rating on the stock to Sell from Neutral. “The company could see near-term upside from Services revenue, but we expect its [business] model transition could take longer than investors have an appetite for.” His target remains at $14, however.

*   Qualys<Qualys Inc. Stock Price (QLYS) | Barron’s> (QLYS): “Healthy profitability at the expense of growth investment. The company continues to lose share in favor of its larger peers and may see incremental risk as the recent Sunburst breach highlights risk associated with offshore R&D.” Target raised to $102, from $96.

All of the stocks Essex recommends traded higher on Friday, led by Ping, which rose 4.8% to $29.87. SecureWorks fell 4.5%, to $13.27. The S&P 500<> climbed 0.5%.