Cybersecurity Pair Trade: CyberArk Upgraded, Qualys Downgraded By JPMorgan

• Shares of Cyberark Software Ltd CYBR are down 19 percent since September 10, while Qualys Inc QLYS shares are up 24 percent.
• JP Morgan’s Sterling Auty upgraded the rating on Cyberark from Underweight to Overweight, while downgrading the rating on Qualys from Neutral to Underweight.
• Growing popularity of privileged account security will benefit CyberArk, while the fading popularity of vulnerability management will hit Qualys, Auty stated.

JP Morgan’s 2016 security survey outlook indicated that security spending in 2016 is likely to be at par with the 2015 levels of up 6 percent. The survey revealed, however, that of the major projects slated for 2016, privileged account security has emerged as a priority area, while vulnerability management has become less popular.

Cyberark: Valuation Offers Attractive Entry Point

Analyst Sterling Auty maintained a price target of $48 for Cyberark. He mentioned that the company’s stock is down 45 percent since February versus no change in the index of its security peers and a 3 percent decline in the S&P 500.

Auty believes that Cyberark’s current stock valuation offers an attractive entry point as the market is rationally pricing in the company’s true growth prospects. He expects the company to deliver 20-25 percent consistent revenue growth, and there is potential for upside with good execution. Such growth is enough to drive share outperformance.

Cyberark has been able to generate operating margins in the high 20 percent range by utilizing its traditional perpetual license plus maintenance model. The extra profits and cash are being used by the company to invest in expanding its addressable market outside the core IT segment.

Qualys: VM Priority Fading

Auty maintained the price target for Qualys at $37. He noted that lower demand for vulnerability management, as revealed by the JP Morgan annual security survey, would restrict Qualys’ performance in the future.

High profile data breaches at several companies had boosted the demand for vulnerability management in 2013. Auty added, however, that the percentage of respondents focusing on vulnerability management projects had declined from 32 percent in 2014 to 21 percent in 2016.

Qualys had been a significant beneficiary of fading competition from legacy products like ISS from International Business Machines Corp. IBM and McAfee Foundstone solution from Intel Corporation INTC. The benefits appear to be fading now, Auty noted.

“We now have two strong public players in the space with Qualys and Rapid 7 (along with a couple private vendors), and while we think each has strengths in different segments of the market we believe the benefits of fading competition are done,” the JP Morgan report stated.

Qualys’ growth prospects could be driven by the successful introduction and ramping of new and enhanced products, Auty stated.