4 Security Stocks to Watch Amid the Flourishing Industry Trend

The Zacks Security industry is experiencing robust demand for cybersecurity products, driven by the increasing need for secure networks and cloud-based applications, especially with the rise of hybrid work environments. This surge in demand is largely due to a significant increase in data breaches, prompting companies to seek comprehensive IT security solutions. The growing need for privileged access security, fueled by digital transformation and cloud migration strategies, is further boosting the demand for cybersecurity solutions.

Companies such as Palo Alto Networks, Inc. PANW, CrowdStrike Holdings, Inc. CRWD, Fortinet, Inc. FTNT and Okta, Inc. OKTA are benefiting from these trends. However, the industry's short-term growth prospects may be hampered as organizations delay investments in large and costly technology products due to global economic slowdown concerns, macroeconomic challenges and geopolitical tensions. Increased operating expenses related to hiring new employees and implementing sales and marketing strategies to gain market share are expected to pressure profit margins in the near term.

Industry Description

The Zacks Security industry encompasses companies that provide both on-premise and cloud-based security solutions. These solutions cater to a variety of needs, such as identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, among others. The industry offers a diverse range of security solutions, many of which can be used interchangeably. These solutions are broadly categorized into three types — Computer Security, Cybersecurity and Information Security. Computer Security focuses on safeguarding the software and hardware of computer systems from vulnerabilities. Cybersecurity encompasses areas like web security, network security, application security, container security and information security. Information Security deals with the protection of data in all forms, whether physical or digital.

Major Trends Shaping the Future of the Security Industry

Rising Cyber Threats Drive IT Security Demand: The increasing frequency of cyberattacks is escalating the need for robust security solutions. These threats not only adversely impact individual companies but also pose risks to national security in some countries. Companies in the security industry are actively addressing these issues as there is a growing need for protection against spear phishing, credential-based attacks, account takeovers and ransomware.

Accelerated Digital Transformation Fuels Growth: The shift toward digital transformation and cloud migration is driving the demand for cybersecurity solutions. Sectors ranging from education and entertainment to healthcare are increasingly relying on technology, making them vulnerable to cyberattacks. Public institutions and large companies, as well as smaller organizations with less stringent security measures, are at risk. The deployment of 5G has expanded the Internet of Things (IoT) and artificial intelligence (AI), which, while simplifying operations, will increase cybercrime rates due to greater technological reliance.

Macroeconomic Headwinds May Affect IT Spending: Uncertain macroeconomic conditions and geopolitical issues may lead enterprises to delay significant IT investments. Amid current economic challenges, organizations are likely to conserve cash and reduce spending, which could negatively impact the security market in the short term.

High Operating Expenses Could Hurt Profitability: To remain competitive in the IT security market, companies are continually investing in expanding their capabilities. This includes substantial investments in research and development to enhance product offerings and improve overall security solutions for clients. Additionally, firms are heavily investing in sales and marketing, particularly by increasing their sales workforce. These elevated operating expenses, aimed at gaining market share, may reduce profit margins in the near term.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #55, which places it among the top 23% of nearly 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s bottom-line estimate for 2026 has moved up to $1.84 from earnings of $1.76 expected a year ago.

Industry’s EPS Estimate Revision

Industry Underperforms S&P 500 and Sector

Over the past year, the Zacks Security industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 composite.

The industry has declined 0.1% during this period, while the broader sector and the S&P 500 have gained 33.6% and 23.2%, respectively.

One-Year Price Return Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing Security stocks, the industry is currently trading at 10.77, higher than the S&P 500’s 5.02 and the sector’s 6.09.

Over the last five years, the industry has traded as high as 19.29X and as low as 6.81X, with a median of 11.74X, as the charts below show.

Price-to-Sales Ratio (Industry vs. S&P 500)

 

Price-to-Sales Ratio (Industry vs. Sector)

 

4 Security Stocks to Watch

Okta: It is a leading provider of identity security for enterprises. Okta currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Okta’s Workforce Identity Cloud combines access management, identity governance and privileged access to provide a gateway that enables its workforce-based customers to securely connect to Okta’s applications from multiple devices. Okta’s Customer Identity Cloud provides bot detection, fraud prevention and account takeover attack protection. Both platforms offer Adaptive Multi-Factor Authentication for secure connectivity.

Its Workforce Identity Cloud and Customer Identity Cloud solutions are experiencing increased traction as a growing number of organizations are adopting digital transformation and cloud migration strategies. Okta had more than 20,000 total customers at the end of fiscal 2026. Its customers with more than $1 million in annual contract value (ACV) increased 16% year over year to 545. Similarly, customers with more than $100,000 in ACV grew 6% to 5,100.

The consensus mark for its fiscal 2027 earnings has been revised upward by 3 cents to $3.71 per share over the past seven days. Shares of OKTA have plunged 23.2% over the past year.

Price and Consensus: OKTA

 

Palo Alto Networks: It offers network security solutions to enterprises, service providers and government entities worldwide. The company has been benefiting from continuous deal wins and the increasing adoption of its next-gen security platforms, which are attributable to the rise of the hybrid work trend and the heightened need for stronger security.

Palo Alto Networks has continued to innovate, focusing on AI, automation and cloud security, to stay ahead of the competition. Its partnership with NVIDIA to develop AI-driven private 5G security solutions highlights its commitment to emerging technologies and next-generation security demands.

The company’s platformization strategy has also been a game-changer. Instead of relying on one-off product sales, Palo Alto Networks has transitioned to a bundled cybersecurity platform approach, which enhances recurring revenues and customer retention. This strategy ensures financial stability and predictable growth.

The Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’s fiscal 2026 earnings has been revised downward by 11 cents to $3.73 per share over the past 30 days. PANW’s shares have declined 5% over the past year.

Price and Consensus: PANW

The continued adoption of digital transformation and cloud migration strategies by organizations is a key growth driver. Its portfolio strength, mainly the Falcon platform’s more than 30 cloud modules, boosts its competitive edge and helps add users. Buyouts, such as SGNL, Seraphic Security, Pangea and Onum, are expected to fuel growth.

CrowdStrike carries a Zacks Rank #3 at present. The consensus mark for its fiscal 2027 earnings has been revised upward by a penny to $4.86 per share over the past seven days. Shares of CRWD have soared 38.9% over the past year.

Price and Consensus: CRWD

 

Fortinet: It is a provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide. Currently, Fortinet carries a Zacks Rank #3.

Fortinet is benefiting from strong demand from large enterprise customers and growth in its security subscriptions. Continued deal wins, especially those of high value, are a key driver. The focus on enhancing its UTM portfolio through product development and acquisitions is a tailwind.

Moreover, the growing adoption of Software-Defined Wide Area Network (SD-WAN) solutions could be a key growth driver for Fortinet in the long run. The market research firm, Future Market Insights, predicts that the market size for SD-WAN solutions could reach $109.9 billion by 2035 from $7.1 billion in 2025, indicating a CAGR of 31.6%. As there are only a few vendors that offer security and SD-WAN solutions, Fortinet is well-positioned to capitalize on the increasing opportunities in the market.

The Zacks Consensus Estimate for Fortinet’s 2026 earnings has been revised upward by 4 cents to $2.96 per share over the past 30 days. FTNT shares have plunged 12.9% over the past year.

Price and Consensus: FTNT

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Palo Alto Networks, Inc. (PANW): Free Stock Analysis Report
 
Fortinet, Inc. (FTNT): Free Stock Analysis Report
 
Okta, Inc. (OKTA): Free Stock Analysis Report
 
CrowdStrike (CRWD): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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