Have Cybersecurity Stocks Peaked?

In a new report this week, Citi Research analyst Walter Pritchard looks at cybersecurity stocks headed into Q2 earnings season. Although many names in the space have had huge run-ups in recent years, Pritchard discussed whether cybersecurity stocks have peaked for the time being.

Demand Is Not An Issue

Overall, almost all data on cybersecurity demand remains strong, including conversations that Citi has had with IT security resellers and customers and data from the firm’s recent CISO survey.

However, Pritchard noted that Citi’s survey data from April indicated the potential for slower firewall refresh rates in 2016 and beyond.

Related Link: First Trust Launches New Cybersecurity ETF

High Expectations

Many cybersecurity stocks have been top performers so far in 2015, including more than 37 percent gains for the following companies:

• Palo Alto Networks Inc PANW
• FireEye Inc FEYE
• CyberArk Software Ltd CYBR
• AVG Technologies NV AVG
• Fortinet Inc FTNT
• Proofpoint Inc PFPT

Pritchard pointed out that this outperformance coupled with increasingly tough year-over-year (Y/Y) comps will lead to increasing scrutiny of cybersecurity stocks this earnings season, as the market looks for any signs of a potential slowdown in the group.

Stock Picks

Citi chooses Check Point Software Technologies Ltd. CHKP as its top cybersecurity pick ahead of Q2 earnings. “We see favorable set-up with street revenue that looks a touch conservative and potential for 2H upside as incremental S&M spend becomes productive,” Pritchard explained.

In addition to Check Point, Citi also has Buy ratings on Proofpoint and Symantec Corporation SYMC.

In the report, Citi maintains its Neutral rating on FireEye and downgrades Fortinet from Buy to Neutral as well.

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