In this article I use AAII’s A+ Investor Stock Grades to provide insight into three cybersecurity stocks gaining momentum from recent events. With the prevalence of cyberwarfare and the likelihood of the tactics used growing in complexity, should you consider these three cybersecurity stocks of Check Point Software Technologies Ltd. (CHKP), CyberArk Software Ltd. (CYBR) and Fortinet (FTNT)?
Cybersecurity Recent News
In our digital era, cybersecurity is vital. It protects against cyber threats, preserves data integrity, ensures privacy and upholds trust online. Without it, individuals and organizations face financial losses, reputation damage and potential security breaches. Prioritizing cybersecurity is essential for a secure digital future
In February 2024, UnitedHealth Group (UNH) experienced a cyberattack putting its customers’ medical records at risk. It is described as the most significant data breach impacting the U.S. health care system to date. UnitedHealth Group is under investigation for allegedly failing to protect the confidential health and personal information of millions of Americans. The company has partnered with cybersecurity firms to investigate the attack and restore systems.
Hospitals and health care providers have faced similar attacks, resulting in disruptions to billing, processing claims and pharmacy operations. These breaches highlight vulnerabilities in the health care industry, raising concerns about patient privacy. Recent cyberattacks have brought attention to the need for robust cybersecurity collaboration across health care providers and hospitals.
Grading Cybersecurity Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three cybersecurity stocks—Check Point Software, CyberArk Software and Fortinet—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Cybersecurity Stocks
What the A+ Stock Grades Reveal
Check Point Software Technologies Ltd. (CHKP) develops, markets and supports a range of products and services for information technology (IT) security. The company’s products and services are sold to enterprises, service providers, small and medium-sized businesses and consumers. It offers enterprises a platform to deploy independent, modular and interoperable security applications (software blades), such as firewall, virtual private network (VPN), intrusion prevention system, application control, anti-bot, antivirus, data loss prevention, policy management, event analysis or multi-domain management. The company offers software blades grouped into functional packages to address specific security issues. Product offerings under these packages include next-generation firewall, threat prevention, secure web gateway and data protection.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Check Point Software has an Earnings Estimate Revisions Grade of C, based on a score of 49, which is neutral. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Check Point Software reported a positive earnings surprise for fourth-quarter 2023 of 3.8%, and in the prior quarter reported a positive earnings surprise of 2.5%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has remained flat at $2.004 per share, based on 10 upward and 16 downward revisions. The consensus earnings estimate for full-year 2024 from 34 analysts has also remained flat at $9.071 per share.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company has a Growth Grade of A, with a score of 89, which is very strong. The company has a five-year sales growth rate of 4.7% and has seen sales increase year over year for five consecutive years. Cash from operations has also been positive in the past five consecutive years.
The company has a Value Grade of D, based on its Value Score of 26, which is expensive. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda). Check Point Software’s price-to-sales ratio is 7.75, which is a rank of 87, compared to the sector median of 2.00. The enterprise-value-to-Ebitda ratio is 17.6, which is a rank of 76, compared to the sector median of 14.6.
CyberArk Software Ltd. (CYBR) is an Israel-based provider of IT security solutions that protects organizations from cyberattacks. The company’s software solutions are focused on protecting privileged accounts, which have become a critical target in the life cycle of cyberattacks. The Privileged Account Security Solution consists of various products, such as Shares technology platform, Enterprise Password Vault, SSH Key Manager, Privileged Session Manager, Privileged Threat Analytics, Application Identity Manager, CyberArk Conjur, Endpoint Privilege Manager and On-Demand Privileges Manager. The company’s products provide protection against external and internal cyber threats and enable detection and neutralization of attacks. The Enterprise Password Vault provides customers with a tool to manage and protect all privileged accounts across an entire organization, including physical, virtual or cloud-based assets.
CyberArk Software has a Value Grade of F, based on a score of 2, which is ultraexpensive. The company has a rank of 97 for the price-to-free-cash-flow ratio and 93 for the price-to-sales ratio. The company has a price-to-free-cash-flow ratio of 216.0 and a price-to-sales ratio of 14.72. CyberArk Software’s price-to-book ratio is 13.97, whereas the sector median is 2.33. The shareholder yield is –2.8%, which translates to a rank of 68.
CyberArk Software has an Earnings Estimate Revisions Grade of B, with a score of 79, which is positive. The company reported a positive earnings surprise for fourth-quarter 2023 of 72.7%, and in the prior quarter reported a positive earnings surprise of 80.3%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has remained the same at $0.275 per share despite one upward revision. Over the last month, the consensus earnings estimate for full-year 2024 from 29 analysts has remained near the same level, currently at $1.754 per share.
CyberArk Software has a Growth Grade of A, based on a score of 94, which is very strong. The five-year annual sales growth rate is 17.0%, above the sector median of 8.9%. The company has a Momentum Grade of A, with a score of 86, which is very strong. CyberArk Software has above-sector-median relative price strength in all four recent quarters.
Fortinet (FTNT) offers cybersecurity and networking solutions. The company provides cybersecurity solutions to a variety of organizations, including enterprises, communication service providers, security service providers, government organizations and small businesses. Product offerings consist of core platform network security products and enhanced platform technology products, which are offered in a range of forms spanning physical appliances, virtual appliances, software and cloud-hosted services. Its secure networking solutions enable the convergence of networking and security across all edges to provide next-generation firewall, software-defined wide area network (SD-WAN) and secure access service edge. Its zero-trust network access solutions enable customers to know and control who and what is on their network. Its FortiGuard security services counter threats in real time with coordinated protection powered by artificial intelligence (AI).
The company has a Value Grade of F, based on its Value Score of 15, which is ultraexpensive. Fortinet has a rank of 32 for shareholder yield, 89 for the price-to-sales ratio and 90 for the enterprise-value-to-EBITDA ratio. The company has a shareholder yield of 2.0%, a price-to-sales ratio of 9.73 and an enterprise-value-to-Ebitda ratio of 32.9.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Fortinet has a Quality Grade of A, with a score of 92, which is very strong. The company ranks strongly in terms of its return of assets and gross income to assets. Fortinet has return on assets of 15.8% and gross income to assets of 56.0%. These compare to the sector median return on assets of –4.4% and the sector median gross income to assets of 27.6%.
Fortinet has an Earnings Estimate Revisions Grade of B, based on a score of 68, which is positive. It reported a positive earnings surprise for fourth-quarter 2023 of 18.1%, and in the prior quarter reported a positive earnings surprise of 12.6%. Over the last month, the consensus earnings estimate for the first quarter of 2024 remained steady at $0.385 per share, despite the 20 upward and six downward revisions. Over the last month, the consensus earnings estimate for full-year 2024 has also remained unchanged, at $1.712 per share.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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