With midterm elections coming up in November, cybersecurity issues will be front and center, more good news for a sector that has already been handily outperforming the market this year. Cybersecurity stocks are up 24% on the year, about five times the gain of the S&P 500, as indicated by the ISE Cybersecurity Index (HXR). A report last week from Goldman Sachs suggests there remains potential upside for a number of cybersecurity stocks, including Qualys Inc. (QLYS), CyberArk Software Ltd. (CYBR), Fortinet Inc. (FTNT), Imperva Inc. (IMPV), Proofpoint Inc. (PFPT), KEYW Holding Corp. (KEYW), Cisco Systems Inc. (CSCO), and Verisign Inc. (VRSN).
As security becomes the top priority for corporate America in the lead up to the midterms, Goldman analysts write that “a rise in allocation to security spending in anticipation of potential threats would boost the top-line of cybersecurity stocks.” (To read more, see: 18 Midterm Election Year Stock Picks).
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Key Growth Factors
The analysts reference recent media reports that suggest there are rising concerns over “the possibility of meddling” in the upcoming midterms as a key factor for having a bullish outlook on the cybersecurity sector. They also reference a recent Goldman Sachs IT Spending Survey, which indicates that security is the highest spending priority for company chief information officers.
While the sector has already outperformed the rest of the market, the Cybersecurity Index is still relatively low compared to highs reached in 2015. Subsequently, the Index plummeted but rose sharply again in the lead up to the 2016 election, suggesting that there are still at least a few more months of positive gains for cybersecurity stocks. (To read more, see: How to Trade the Rise in Cybersecurity Stocks.)
What happens after the election is a little more uncertain, as a change in majorities in the House of Representative could drastically alter U.S. government spending priorities. However, even if government spending on cybersecurity is cut back, there are other reasons to remain bullish: being heavily weighted toward software, the industry is more immune to tariffs. Further, rising interest rates will have limited downside impact as “the median cybersecurity stock has a stronger balance sheet than the median S&P 500 company.”
The analysts expect sales for the cybersecurity sector to grow at a pace of 9% in 2019, faster than the forecasted 6% for the IT sector and 5% for the S&P 500.
Coming off a first-quarter earnings report that beat analysts’ estimates, Qualys recently raised guidance back in June, indicating the company expects to see sustained top-line growth of 20% through to 2021. The cybersecurity company’s cloud functionality continues to expand, driving “both security and network management capabilities,” according to Needham analyst Alex Henderson, as quoted by Investor’s Business Daily.
Another beneficiary of the cloudification of business IT, Fortinet also topped analyst estimates in the first quarter. UBS analyst Fatima Boolani believes the company “has a credible shot at becoming a top vendor in the overall network security space—currently commanded by Cisco, Palo Alto and Check Point,” according to a separate article by Investor’s Business Daily.