The Zacks Security industry is experiencing robust demand for cybersecurity products, driven by the increasing need for secure networks and cloud-based applications, especially with the rise of hybrid work environments. This surge in demand is largely due to a significant increase in data breaches, prompting companies to seek comprehensive IT security solutions. Additionally, the growing need for privileged access security, fueled by digital transformation and cloud migration strategies, is further boosting the demand for cybersecurity solutions.
Companies like Varonis Systems, Inc. VRNS and Qualys, Inc. QLYS are benefiting from these trends. However, the industry's short-term growth prospects may be hampered as organizations delay investments in large and costly technology products due to global economic slowdown concerns, macroeconomic challenges and geopolitical tensions. Furthermore, increased operating expenses related to hiring new employees and implementing sales and marketing strategies to gain market share are expected to pressure profit margins in the near term.
Industry Description
The Zacks Security industry encompasses companies that provide both on-premise and cloud-based security solutions. These solutions cater to a variety of needs, such as identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, among others. The industry offers a diverse range of security solutions, many of which can be used interchangeably. These solutions are broadly categorized into three types: Computer Security, Cybersecurity and Information Security. Computer Security focuses on safeguarding the software and hardware of computer systems from vulnerabilities. Cybersecurity encompasses areas like web security, network security, application security, container security and information security. Information Security deals with the protection of data in all forms, whether physical or digital.
Major Trends Shaping the Future of the Security Industry
Rising Cyber Threats Drive IT Security Demand: The increasing frequency of cyberattacks is escalating the need for robust security solutions. These threats not only impact individual companies but also pose risks to national security in some countries. Companies in the security industry are actively addressing these issues as there is a growing need for protection against spear phishing, credential-based attacks, account takeovers and ransomware.
Accelerated Digital Transformation Fuels Growth: The shift toward digital transformation and cloud migration is driving the demand for cybersecurity solutions. Sectors ranging from education and entertainment to healthcare are increasingly relying on technology, making them vulnerable to cyberattacks. Public institutions and large companies, as well as smaller organizations with less stringent security measures, are at risk. The rollout of 5G will further expand the Internet of Things (IoT) and artificial intelligence (AI), which, while simplifying operations, will also increase cybercrime rates due to greater technological reliance.
Macroeconomic Headwinds May Impact IT Spending: Uncertain macroeconomic conditions and geopolitical issues may lead enterprises to delay significant IT investments. Amid current economic challenges, organizations are likely to conserve cash and reduce spending, which could negatively affect the security market in the short term.
High Operating Expenses Could Affect Profitability: To remain competitive in the IT security market, companies are continually investing in expanding their capabilities. This includes substantial investments in research and development to enhance product offerings and improve overall security solutions for clients. Additionally, firms are heavily investing in sales and marketing, particularly by increasing their sales workforce. These elevated operating expenses, aimed at gaining market share, may reduce profit margins in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #2, which places it among the top 1% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s bottom-line estimate for 2024 has moved up to 34 cents from earnings of 12 cents expected a year ago.
Industry’s Fiscal 2024 EPS Estimate Revision
Industry Lags the S&P 500 and the Sector
The Zacks Security industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry has soared 20.2% during this period, while the broader sector and the S&P 500 have returned 41.7% and 32.7%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing Security stocks, the industry is currently trading at 11.31X, higher than the S&P 500’s 5.2X and the sector’s 6.32X.
Over the last five years, the industry has traded as high as 17.53X and as low as 7.53X, with a median of 11.55X, as the charts below show.
Price-to-Sales Ratio (Industry vs. S&P 500)
Price-to-Sales Ratio (Industry vs. Sector)
2 Security Stocks to Buy
Qualys: The company offers cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures, thus helping protect their IT systems and applications from cyberattacks. Currently, Qualys carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Qualys is benefiting from the increasing demand for cloud-based cybersecurity solutions amid growing cyber threats and digital transformation initiatives. With a diverse customer base that includes enterprises and government entities, Qualys maintains a balanced customer mix, which keeps it resilient against fluctuations in IT spending.
Qualys' continuous innovation and focus on expanding product capabilities position it well to navigate market challenges and sustain long-term growth despite potential macroeconomic disruptions. A continuous increase in Vulnerability Management, Detection and Response to customer penetration is an upside. Qualys' ability to attract new customers and retain existing ones underscores its strong market positioning and value proposition. For the last few quarters, the company has been able to close a significant number of six-figure deals.
The Zacks Consensus Estimate for 2024 earnings has been revised a penny downward to $5.57 per share over the past 30 days. Qualys shares have plunged 17% over the past year.
Price and Consensus: QLYS
Varonis Systems: The company provides an innovative software platform that allows enterprises to map, analyze, manage and migrate their unstructured data. Its products include DatAdvantage, DataPrivilege, IDU Classification Framework, Data Transport Engine and DatAnywhere. The company sells its products to small and medium businesses and large multinational enterprises in financial services, consumer and retail, industrial, healthcare, and energy and utility industries.
Varonis Systems is benefiting from the rising demand for cyber security solutions due to the long list of data breaches. Increasing demand for privileged access management solutions due to digital transformation strategies remains a key growth driver. Strong presence across small and medium businesses and large multinational enterprises in financial services, consumer and retail, industrial, healthcare, and energy and utility industries is driving revenues.
Varonis Systems currently carries a Zacks Rank #2 (Buy). The consensus mark for its 2024 earnings has been revised upward by 8 cents to 24 cents per share over the past 60 days. Shares of VRNS have soared 87.1% over the past year.
Price and Consensus: VRNS
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