Technology

Cybersecurity Stocks Have Been Crushed: 4 That Could Get Bought Out

Sometimes the hottest stocks on Wall Street can turn cold as ice. The combination of institutional and retail selling has combined with opportunistic event-driven hedge funds using the selling pressure to short and continue to short until there’s a turn in the group. One of the best examples is biotech and specialty pharma, which were all doing fine until presidential candidate Hillary Clinton threw out some hot political rhetoric on pricing.

Another sector that was cruising right along was the cybersecurity software stocks, where some actually have had two complete rounds-trips over the past two years. The middle of the summer saw the 2015 high point, and most of the companies have taken a sharp dive since. It certainly isn’t because business is bad, as cybersecurity concerns dominate corporate and government information technology departments.

We decided to screen the top cybersecurity stocks for those with the largest price drops, and also those that have presented the biggest earnings surprises in the past. We also cross-referenced those with companies rated Buy at Merrill Lynch. While they don’t see any specific candidates yet, the chatter on Wall Street on takeouts is almost constant. One or more companies may very likely either be bought or perhaps even merge.

The stocks we screened from the Merrill Lynch universe are all rated Buy.

CyberArk Software

This company had a red-hot IPO last year and is part of the security theme at Merrill Lynch. CyberArk Software Ltd. (NASDAQ: CYBR) claims it is the only security company focused on eliminating the most advanced cyber threats, those that use insider privileges to attack the heart of the enterprise. The company proactively secures against cyber threats before attacks can escalate and do irreparable damage. Some 35% of the Fortune 100 and 17 of the world’s top 20 banks use the software to protect high-value information assets, infrastructure and applications.

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Merrill Lynch highlights CyberArk’s unique and innovative technology that has a very large and rapidly growing market opportunity of somewhere near $2.1 billion. It also sees the company growing revenues at an astonishing 25% for the next several years, and the potential for 25% to 30% operating margins. CyberArk crushed earnings expectations for the second quarter and posted strong forward guidance. The stock was hit very hard during the current sell-off and is down almost 40% from highs posted in June.

Merrill Lynch recently raised its price target from $70 to $80. The Thomson/First Call consensus target is $64.42. Shares closed Friday at $46.10.
Check Point Software Technologies

This company remains one of the top tech stocks to buy on Wall Street for a security presence and is on the Merrill Lynch US1 list. Check Point Software Technologies Ltd. (NASDAQ: CHKP) is one of the best in helping customers protect against advanced persistent threats. Check Point is considered a worldwide leader in securing the Internet, providing customers with uncompromised protection against all types of threats, reducing security complexity and lowering the total cost of ownership. Check Point first pioneered the industry with FireWall-1 and its patented stateful inspection technology.

The company’s revenue growth rate has accelerated almost every quarter over the past year and a half. Many on Wall Street think that Check Point should see year-over-year accelerating growth in product licenses, particularly as the security firewall refresh appears to be in the beginning stages. It’s not out of the question that Check Point could look for acquisition to bolster the already outstanding product line.

Check Point topped third-quarter earnings estimates on strong demand for its advanced threat prevention and mobile security technologies.

The Merrill Lynch price target for the stock is $94. The consensus target is $92.91. The stock closed Friday at $80.43.

FireEye

This stock has been absolutely crushed, tumbling almost 40% since June, and could offer massive upside. FireEye Inc. (NASDAQ: FEYE) has been mentioned recently as a takeover target, with numerous big tech companies listed as possible suitors. The company announced earlier this year that it will be working with Visa to help the credit card giant develop products for merchants and credit card issuers to defend against large-scale attacks on payment data. FireEye is in an arena where it may drive the next big wave of cybersecurity technology.

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FireEye has invented a purpose-built, virtual machine-based security platform that provides real-time threat protection to enterprises and governments worldwide against the next generation of cyberattacks. These highly sophisticated cyberattacks easily circumvent traditional signature-based defenses, such as next-generation firewalls, IPS, anti-virus and gateways. The FireEye Threat Prevention Platform provides real-time, dynamic threat protection without the use of signatures to protect an organization across the primary threat vectors and across the different stages of an attack life cycle. The core of the FireEye platform is a virtual execution engine, complemented by dynamic threat intelligence, to identify and block cyberattacks in real time. FireEye has over 3,400 customers across 67 countries, including over 250 of the Fortune 500.

The Merrill Lynch price target price is $50, and the consensus target is $48.26. The stock closed Friday at $27.23.

Fortinet

This company was rewarded with good earnings recently by getting absolutely hammered. Fortinet Inc. (NASDAQ: FTNT) is well liked on Wall Street and its fast, secure and global cybersecurity solutions provide broad, high-performance protection against dynamic security threats while simplifying the IT infrastructure. They are strengthened by the industry’s highest level of threat research, intelligence and analytics. Unlike pure-play network security providers, Fortinet can solve organizations’ most important security challenges, whether in networked, application or mobile environments — be it virtualized/cloud or physical

Fortinet shareholders were horrified last week that even as the company posted outstanding top and bottom line results it provided forward guidance that didn’t sit well, including with many of the analysts covering the stock. Billings growth grew a staggering 40.5% year over year, driven by strong demand for high-end appliances, subscriptions and new product offerings.

Merrill Lynch remains very positive on Fortinet and notes that while the fourth-quarter guidance was less than expected, some of that can be attributed to weak Canadian and emerging markets. It thinks Fortinet can continue to outgrow the market in the foreseeable future due to sales force productivity gains and product refreshes.

The Merrill Lynch price target is $50, and the consensus target is $49.19. Shares closed Friday at $34.91.

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Despite the beating these stocks have taken, the need and demand for cybersecurity software is only going to increase. The almost daily reports of hacking at the highest levels of business, and even the government, shows that cyber criminals are advancing fast and are learning workarounds to many security measure currently in place. All these companies make sense for a large cap tech services company like Hewlett-Packard or IBM looking to enter the space.

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