With a growing reliance on technology and the rise of cyber threats, organizations and individuals increasingly spend on protecting their data. This has increased the demand for cybersecurity solutions.
As the industry’s long-term prospects look good, fundamentally sound and profitable software stocks Tenable Holdings, Inc. (TENB), Fortinet, Inc. (FTNT) and Trend Micro Incorporated (TMICY) could be wise portfolio additions now.
The U.S. cybersecurity market is expected to generate $71.79 billion in revenue by 2023. Also, the security services market is expected to reach $39.78 billion in 2023.
The global cybersecurity industry is expected to grow at a CAGR of 10.1% to reach $450.74 billion by 2030. Increased cyber-attacks across numerous industries will likely drive this growth. Also, incorporating new technologies such as AI and ML into cybersecurity solutions is projected to propel market expansion even further.
AI is rapidly becoming a vital component for IT security organizations, enabling analysis and threat identification to reduce breach risk, prioritize risks, direct incident response, and detect malware attacks, moving cybersecurity forward and enhancing organizational security posture.
Also, it can help cyber security companies constantly learn new approaches to attacks, allowing them to stay one step ahead of hackers and improve overall protection strategies.
In light of these encouraging trends, let’s look at the fundamentals of the three Software - Security stock picks, beginning with number 3.
Stock #3: Tenable Holdings, Inc. (TENB)
Headquartered in Columbia, Maryland, TENB provides cyber exposure solutions in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan.
On October 2, 2023, TENB acquired Ermetic, Ltd., an innovative cloud-native application protection platform (CNAPP) company and a leading provider of cloud infrastructure entitlement management (CIEM). The acquisition combines two cybersecurity innovators, marking an important milestone in TENB’s mission to shift organizations to proactive security.
TENB’s trailing-12-month gross profit margin of 76.75% is 55.8% higher than the 49.27% industry average. Its trailing-12-month levered FCF margin of 17.91% is 139.8% higher than the industry average of 7.47%.
During the fiscal second quarter that ended June 30, 2023, TENB’s revenue came in at $195.04 million, up 18.7% year-over-year, while its non-GAAP gross profit increased 18.2% year-over-year to $157.50 million.
Its non-GAAP net income and non-GAAP EPS came in at $26.27 million and $0.22, up 340.5% and 340% year-over-year, respectively.
The consensus revenue estimate of 788.76 million for the year ending December 2023 represents a 15.5% increase year-over-year. Its EPS is expected to grow at 70.8% year-over-year to $0.65 for the same period. It surpassed EPS estimates in all four trailing quarters. TENB’s shares have gained 41.7% over the past year to close the last trading session at $42.82.
TENB’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TENB also has a B grade for Growth and Quality. It is ranked #5 out of 23 stocks in the Software - Security industry. Click here for the additional POWR Ratings for Value, Stability, Sentiment, and Momentum for TENB.
Stock #2: Fortinet, Inc. (FTNT)
FTNT offers comprehensive, integrated, and automated cybersecurity and networking solutions globally. Its products include FortiGate hardware and software licenses, FortiSwitch for secure switching, and FortiAP for wireless networking.
FTNT’s trailing-12-month ROTC of 73.37% is significantly higher than the 2.37% industry average. Its trailing-12-month net income margin of 21.24% is 944.4% higher than the 2.03% industry average.
In the second quarter that ended June 30, 2023, FTNT’s total revenue increased 25.5% year-over-year to $1.29 billion, while its gross profit increased 27.9% year-over-year to $997 million. Its non-GAAP operating income grew 36.3% from the year-ago value to $348.10 million.
The company’s adjusted net income and EPS came in at $300.40 million and $0.38, representing increases of 54.8% and 58.3%, respectively, from the prior-year quarter.
Street expects FTNT’s revenue to increase 22.4% year-over-year for the year ending December 2023 to $5.41 billion. Its EPS is expected to increase by 26.9% year-over-year to $1.51. It surpassed EPS estimates in all four trailing quarters.
Over the past nine months, the stock has gained 18.2% to close the last trading session at $57.76.
FTNT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #4 in the same industry. It has an A grade for Quality and a B for Sentiment. To see additional FTNT ratings for Growth, Value, Momentum, and Stability, click here.
Stock #1: Trend Micro Incorporated (TMICY)
TMICY, based in Japan, develops and sells security software for computers and the Internet. It offers hybrid cloud security, intrusion prevention, cloud migration, network defense, security for small and medium-sized enterprises, endpoint security, and 5G security solutions.
TMICY’s trailing-12-month net income margin of 11.23% is 452.3% higher than the industry average of 2.03%. Its trailing-12-month ROCE of 12.29% is significantly higher than the industry average of 1.01%.
TMICY’s net sales for the six months ended June 30, 2023, increased 13.5% from the previous year’s period to ¥119.54 billion ($816.02 million), while its operating income came in at ¥18.19 billion ($124.16 million). Its gross profit stood at ¥90.03 billion ($614.61 million), up 12.8% year-over-year.
Additionally, net income attributable to owners of the parent amounted to ¥11.86 billion ($80.94 million) and ¥85.80 per share in the same period.
Analysts expect TMICY’s revenue to increase 172.2% year-over-year to $1.67 billion for the year ending December 2023. Its EPS is expected to come in at $1.35 for the same period. Shares of TMICY have lost 8.7% over the past month to close the last trading session at $37.56.
It’s no surprise that TMICY has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Stability and a B for Value and Quality. It is ranked #2 in the Software - Security industry.
Beyond what is stated above, we’ve also rated TMICY for Growth, Sentiment and Momentum. Get all TMICY ratings here.
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FTNT shares were trading at $59.16 per share on Monday morning, up $1.40 (+2.42%). Year-to-date, FTNT has gained 21.01%, versus a 15.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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