Zscaler, CrowdStrike: Cybersecurity Stocks To Watch After The SolarWinds Attack

Our indicative theme of Cybersecurity Stocks has returned over 150% since the end of 2019, compared to gains of about 21% on the S&P 500 over the same period. The theme is up by about 5% year-to-date. Cybersecurity companies typically provide software, hardware, and services that help protect computer systems and networks from data theft and potential disruption of services. The sector saw renewed interest late last year, following news of a large cyber-attack on IT infrastructure and network management software vendor SolarWinds, causing increasing concerns that software tools used daily by organizations and governments could be vulnerable. More broadly, following Covid-19, economic activity is increasingly moving online with businesses also becoming more distributed on account of the work from home trend. This should cause companies to prioritize their cybersecurity spending. Within our theme,  Zscaler (NASDAQ:ZS) and CrowdStrike (NASDAQ:CRWD) have been the strongest performers, with their stock prices rising by almost 5x each since the end of 2019. On the other hand, Qualys (NASDAQ:QLYS) has underperformed, declining by about 16% over the same period.

See our Cybersecurity Stocks theme for a complete list of the companies in our theme and a look at their recent performance.

[5/22/2020] Cybersecurity Stocks

Cybersecurity stocks have rallied sharply this year, with our indicative theme of six cybersecurity stocks that include Palo Alto Networks (NYSE: PANW), Zscaler (NASDAQ: ZS), and others up by about 28% year-to-date, on an equally weighted basis. While cybersecurity is a relatively diverse and complex sector, we believe there could be two broad trends driving the surge. Firstly, with the spread of the Coronavirus pandemic, more people have been working from home, and this has required companies to better secure corporate IT infrastructure, driving up demand for cybersecurity tools. Secondly, most of these companies offer their services on a subscription basis, with recurring revenue streams that could make them a stable bet during times of uncertainty. It’s also very likely that the crisis will cause a structural shift in the way businesses operate, benefiting these stocks well past the pandemic. Our theme of Cyber Security Stocks outlines some of the key names in the cybersecurity space and how they have performed in recent years. A part of the analysis is summarized below.

Zscaler ($10 billion market cap, $303 million FY’19 revenue), offers two tools, namely Zscaler Private Access (ZPA) which provides secure access to internally managed applications, that are hosted internally in data centers or in private or public clouds, and Zscaler Internet Access (ZIA), which enables users to connect to externally managed applications such as Microsoft’s Office 365 and Salesforce. The stock has surged by 60% this year, as an increasingly distributed workforce drives demand for the company’s secure access solutions.

Palo Alto Networks ($23 billion market cap, $2.9 billion revenue) is a cybersecurity company best known for its firewalls, which are network security devices that scan for malicious traffic. The company has been increasingly focusing on cloud-based software-as-a-service (SaaS) security tools. While the stock is down slightly year-to-date, partly due to slowing revenue growth, the company could be a good long-term bet as businesses increasingly move online.

CrowdStrike ($17 billion, $481 million revenue) offers a cloud-delivered endpoint protection platform, which relies on a lightweight software running on the customer’s servers or laptops. These applications, in turn, send data to a cloud-based security system that analyses threats. The stock is up by over 60% year-to-date, as the coronavirus pandemic has expanded the company’s addressable market meaningfully.

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