The software stocks have had an incredible run during the 10-year bull market, but some of the top players in the industry were hammered recently, and it may make sense to start looking for those companies that are not so valuation rich. In fact, as recently as last week some of the top stocks in the cloud, software as a service (SaaS) and customer relationship management areas were absolutely torched. While they remain outstanding stocks to invest in, the rich valuations attached can’t survive forever, especially if the market takes a dive.
One segment that remains in demand is security software, and with good reason. Even as technology has improved to keep hackers and cybercriminals away, the technology they use has improved as well, so the constant battle to stay one step ahead remains.
A new Deutsche Bank research report notes that while the cybersecurity stocks have done well this year, there are also concerns on valuations, but they may not be as pressing as those in the cloud and SaaS areas. The report noted this:
From a sentiment perspective within our coverage, there does not seem to be one dominant theme or trend that investors are really focused on today. The group has performed well year-to-date with the typical stock up about 30% (vs the Nasdaq at +19%) and even companies that are viewed as secularly challenged are up 20%+ this year. We hear a good number of concerns on valuation levels in the security space which makes sense given that the group trades at a median of over 8.0x Enterprise value/2019 sales versus the group’s historical average of closer to 6.0x 12 months forward. That said, most agree that fundamentals across various sub-sectors within security are strong and struggle to find names to short.
Deutsche Bank has four cybersecurity stocks rated Buy, and they make sense for aggressive accounts looking for exposure to this segment.
This company has less than a $5 billion market cap, which makes it a prime takeover target. CyberArk Software Ltd. (NASDAQ: CYBR) claims to be 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. It is estimated that at least 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.
CyberArk pioneered a new layer of information technology (IT) security solutions that protect organizations from cyberattackers that have evaded the network perimeter. CyberArk solutions secure an organization’s critical assets, dubbed privileged accounts, which are the keys to databases, industrial control systems, servers and applications, all which house sensitive data. CyberArk software is focused on protecting these accounts, which are highly targeted in cyberattacks to disrupt networks or steal sensitive info.
The Deutsche Bank price objective for the stock is $119, but the Wall Street consensus target is $121.85. The shares traded on Wednesday’s close at $121.02.
This is another smaller cap play that also offers investors some choice upside potential. New Relic Inc. (NYSE: NEWR) engages in the provision of SaaS for digital intelligence products. It allows users to monitor software and infrastructure performance and measure end-user activities through desktop and mobile devices.
New Relic provides the real-time insights that software-driven businesses need to innovate faster. Its cloud platform makes every aspect of modern software and infrastructure observable, so companies can find and fix problems faster, build high-performing DevOps teams and speed up transformation projects.
The stock was caught in the recent selling that hit SaaS and cloud stocks, and the analysts said this:
We heard a lot of questions on the recent sell-off in the company. No one can really point to one individual reason causing the weakness although some think it could be related to the potential for New Relic to compete more against DataDog overtime. Given that both DataDog and New Relic state they rarely compete directly against each other – we would be surprised if that was a material factor behind recent activity.
Deutsche Bank has a $120 price target, while the consensus target is $121.83. The stock closed trading most recently at $98.08 a share.