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Do These Cybersecurity Stocks Have Upside Potential?

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Cybersecurity stocks have generated significant returns

Shares of cybersecurity stocks have generated significant returns over the years. These companies are part of a high-growth industry and have increased investor wealth. Will cybersecurity stocks continue to rise, or will they experience a correction driven by fears of a tech slowdown?

Palo Alto Networks

Shares of Palo Alto Networks (PANW) have returned 11.4% in 2019. The stock has gained 66.4% in the last three years and 171.6% in the last five years. PANW gained 32.0% in the first four months of the year and then fell ~20.0% in May. PANW fell after it announced that it was moving toward a subscription-based business model and away from its three-year contract model. The escalation in the trade war is also set to negatively affect its earnings by $0.02 in the fourth quarter of fiscal 2019 (which ends in July).

PANW’s acquisition of Twistlock and PureSec will affect its bottom line in the near future. PANW had estimated fiscal 2019 fourth-quarter EPS of $1.41–$1.42, far below Wall Street’s estimate of $1.55. However, this pullback provides an opportunity for investors. PANW remains a high-growth stock, and its sales rose 29.0% year-over-year in the first nine months of fiscal 2019.

PANW’s earnings rose by an even more impressive 40.0% in the period. Its recent acquisitions will expand its product and service portfolio and help it gain market share. Its transition toward a subscription-based model will affect its cash flows in the short term but will result in a stable stream of recurring revenue going forward.

What we think of Palo Alto

We identified PANW as overvalued back in May, and the stock lost over 20.0% in the month. In June, we stated that the stock should rise, and it’s since gained ~5.0%. PANW is trading at a forward PE multiple of 33.7x. This multiple doesn’t seem too expensive considering the company’s earnings growth rate. PANW’s earnings are expected to rise 35.3% in fiscal 2019, 15.4% in fiscal 2020, and 24.7% in the next five years.

Analysts remain optimistic about PANW. The 41 analysts tracking PANW stock have given it an average 12-month target price of $265.88, indicating an upside potential of 26.7% from its current price.

Proofpoint

Shares of Proofpoint (PFPT) have returned over 46.0% in 2019. The stock has gained 82.0% in the last three years and 262.5% in the last five years. Proofpoint has been on a roll this year. It fell over 15.0% between May 1 and June 3 driven by broader market weakness and an uncertain macro environment. The stock has since gained over 20.0% in market value.

Proofpoint remains a high-growth stock, and analysts expect its sales to rise 22.3% in 2019 and 21.2% in 2020. PFPT is trading at a forward PE multiple of 61.0x. This multiple seems expensive considering the company’s earnings growth rate. PFPT’s earnings are expected to rise just 0.7% in 2019, 35.8% in 2020, and 25.0% in the next five years.

PFPT’s upcoming earnings remain critical. Any miss will send the stock down due to its premium valuation. The 30 analysts tracking PFPT stock have an average 12-month target price of $139.15, indicating an upside potential of 13.6% from its current price.

Symantec

Shares of Symantec (SYMC) have returned 36.5% in 2019. The stock has gained 22.2% in the last three years and 38.8% in the last five years. Its multiyear gain is far from impressive. SYMC gained momentum recently after Broadcom (AVGO) announced its intent to acquire the former.

SYMC has been grappling with growth, management, and regulatory issues over the last year or so. In May 2018, SYMC lost a quarter of its value when it launched an internal investigation after a former employee raised issues related to its disclosure of historical results, stock plans, and executive compensation. Symantec stock fell 9.0% in after-hours trading on August 2, 2018, after it reported its fiscal 2019 first-quarter earnings results and slashed its revenue forecast for the year.

Symantec shares again fell ~25.0% in May this year after it issued soft guidance for the first quarter of fiscal 2020. SYMC was also affected by the abrupt resignation of its CEO during its latest earnings release. Its CFO stepped down in the third quarter of fiscal 2019.

SYMC stock will likely move sideways until Broadcom closes its acquisition. Wall Street will be waiting to see if Symantec is acquired at a premium to its current valuation. It was recently reported that Broadcom is arranging funds for the acquisition of Symantec, though the deal’s terms are undisclosed.

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