How Did Security Stocks Do This Quarter?

 | May 03, 2017 04:48AM ET

Security spending is expected to grow in leaps and bounds over the next few years.

IDC estimates that cyber-security related services, software and hardware will see around 8.3% CAGR through 2020. This will come off a strong 2016 wherein security services was the strongest category (45% estimates growth), followed by security software (user behavior analytics software being one of the fastest growing sub-segments). The U.S. is currently the largest market for cyber-security, followed by Western Europe.

Gartner says spending on information security will be up 7.6% this year to touch $90 billion and continue growing thereafter to touch $113 billion by 2020. The research firm thinks that spending focus will gradually away from prevention-only approaches to detection and response through the forecast period.

Leading Security Software Vendors

Asia/Pac is the fastest-growing region according to IDC, with Asia/Pac excluding Japan seeing 21% growth in 2016 and Japan 16.9%. In comparison, the U.S. grew just 5.8% and EMEA 6.8%. The security appliance market grew 9.7% in 2016 to $11.5 billion.

The top five vendors account for about half the market with others accounting for the rest. Cisco (NASDAQ:CSCO) is the largest vendor according to IDC with a 15.3% share in 2016 but Checkpoint isn’t far behind at 12.8%. Palo Alto with 11.8%, Fortinet with 9.6% and Huawei with 3.2% round out the top five. Cisco and smaller players ceded share while Checkpoint managed to hold its own.

Market Drivers

There are some very strong secular drivers of this market that should lead to continued increase in demand for years to come.

Given the increase in incidences of hacking, ID theft, the increased sophistication of cybercrime and growing privacy concerns, governments across the world are tightening security regulations for companies and banks leading to a security compliance market. Additionally, government procurement of security solutions is also on the rise as technology is closely linked to national security as well.

The second major driver is the ongoing shift of corporate workloads to the cloud termed cloud computing. The shift, which includes public, private and hybrid environments, is becoming highly complex and leading to many different security situations, some of which may be unique to a given circumstance. This is leading to a cross-platform approach to security and the evolution of security-as-a-service.

The shift to cloud computing hasn’t reduced the demand for end-point security because there are still a large number of organizations and individuals with computing devices, many of which are mobile. Some of these also access the information stored in the cloud, thereby representing points of vulnerability. With the advent of IoT and driverless cars, these end points may be expected to rise dramatically, increasing chances of security threats.

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Cost is the only major deterrent to security deployment, since organizations need space, personnel and software, which suck up significant resources. But this is actually opening people up to cloud-based software solutions.

Earnings Results

Here are earnings summaries from Checkpoint, Fortinet, FireEye, F5 Networks and Proofpoint:

Check Point Software Technologies Ltd (NASDAQ:CHKP)

Check offers policy-based enterprise security and traffic management solutions. Through its patented Stateful Inspection technology, it protects information assets and enhances the performance of enterprise networks.

Checkpoint’s first-quarter results were encouraging, since the company reported revenue and earnings that were both better than the Zacks Consensus Estimates. Two factors drove the strong results: the first was a stronger mix of new products that resulted from customer upgrades and the company’s own bundling policy while the second was the increase in high-value deals (customers with aggregated transaction value over $1 million increased by 16% to 50 customers).

Management said that the company saw triple digit growth across the key focus areas of cloud, mobility and threat prevention. Another encouraging factor was deferred revenue, which grew 20% from the year-ago quarter to around $1.1 billion. (Read more: Check Point Q1 Earnings & Revenues Beat, Guides Well )

Zacks Rank #3 (Hold)

Growth Score: A, Momentum Score: B, VGM Score: B (mainly for investors looking for growth stocks)