The software industry has had an incredible run during the 10-year bull market, but some of the top players were hammered recently, and it may make sense to start looking for companies in the sector that are not so valuation rich. In fact, last summer some of the top stocks in the cloud, software as a service (SaaS) and customer relationship management (CRM) 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 downward dive.
One area 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 in place.
A new Jefferies research report notes that spending on cybersecurity continues to rise as a percentage of information technology budgets, but available solutions far outpace this budget growth, driving more scrutiny on budget allocation than has been seen in the past. The report said this:
A pervasive theme of the day at the firms third annual cyber summit was a lack of a true platform play dominating the entire security industry similar to a salesforce.com. While we believe there’s a desire from customers to consume security from only one consolidated platforms, rather than piecemeal from many different vendors, it simply has not come to fruition yet. The Internet has undeniably far expanded network boundaries but physical firewalls remain a foundational element to an increasingly layered defense approach.
Three top companies remain favorites at Jefferies and both are top picks for 2020.
Palo Alto Networks
This continues to be one of the most dominant players in its industry. Palo Alto Networks Inc. (NASDAQ: PANW) is helping to lead a new era in cybersecurity by protecting thousands of enterprise, government and service provider networks from cyber threats. Unlike fragmented legacy products, its security platform safely enables business operations and delivers protection based on what matters most in today’s dynamic computing environments: applications, users and content.
Palo Alto Networks security platform has new features that were introduced to help security professionals overcome the distractions and time spent on problems caused by the overwhelming volume of alerts and manual processes associated with operating many discrete security products and, instead, expand breach prevention capabilities and boost operational efficiency.
The Jefferies price target for the stock is $275, and the Wall Street consensus price objective is $261.82. The shares closed Thursday’s trading at $245.51.
Shares of this off-the-radar company have outstanding upside potential. SailPoint Technologies Holdings Inc. (NASDAQ: SAIL) engages in the provision of enterprise identity governance solutions. It also offers licensing of software, sale of professional services, maintenance and technical support.
Leveraging artificial intelligence and machine learning, SailPoint’s predictive identity governance platform delivers adaptive security and continuous compliance while dramatically improving operational efficiency. With SailPoint, organizations of all sizes can embrace innovation, expand their workforce globally and evolve their business, securely and confidently.
SailPoint helps protect some of the world’s most prominent companies in a wide range of industries, including nine of the top 15 banks, four of the top six health care insurance and managed care providers, nine of the top 15 property and casualty insurance providers, five of the top 13 pharmaceutical companies and 11 of the largest 15 federal agencies.
Jefferies has a $28 price target, and the posted consensus target is $27. The shares closed at $23.52 on Thursday.
This stock remains a top buy on Wall Street. Splunk Inc. (NASDAQ: SPLK) provides a software platform for collecting, storing, indexing, searching and analyzing machine-generated data, such as log files and configuration files, which are prevalent in every type of IT system, device and application.
Splunk technology is potentially applicable and disruptive in several market segments, including IT operations, security and compliance, and business intelligence. These market segments are collectively worth $28 billion today.
Jefferies notes that the company offers the de facto standard for security information and event management solutions. It also offers orchestration solutions for security operations, a new emerging category of products.
The $157 Jefferies target price compares to the consensus target of $152.71 and the most recent close at $116.99.
While the whirlwind around the top stocks in the sector has slowed dramatically from the pace of four and five years ago, the need is increasing every year. These top stocks offer investors solid ways to play the sector in a multitude of areas.