In today's constantly evolving digital environment, security software solutions are crucial in protecting valuable data. Their capacity to prevent or reduce data breaches is integral to the success of the continually expanding digital transformation in the business world.

Given this backdrop, I present quality software stocks Varonis Systems, Inc. (VRNS), Radware Ltd. (RDWR), and Qualys, Inc. (QLYS) worth adding to one’s watchlist. While these three software stocks are currently rated a C (Neutral) in our POWR Ratings system, they are well positioned to be upgraded to B (Buy) soon. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The emergence of mobile-networked devices, the prevalence of electronic communications, the growth of social media, and the escalating reliance on Big Data underscore the need for cybersecurity systems that help adapt to the changing threat landscape.

The cybersecurity landscape is evolving into an intricate, highly interconnected system, necessitating adaptive, multi-layered, and self-learning security measures. Cybersecurity is now a central component of high-level strategic planning.

According to Statista, the cybersecurity market is on track to reach $71.79 billion this year, with Security Services leading the way at an estimated $39.78 billion. The U.S. cybersecurity industry is expected to grow at a CAGR of 9.7% until 2028, resulting in a market volume of $113.8 billion.

In addition, governments globally are bolstering their investments in cybersecurity solutions to safeguard their devices and sensitive data from cyberattacks, thereby fostering the industry’s growth.

Furthermore, technological advancements in AI, ML, IoT, 5G, edge computing, and cloud technology are spurring innovative solutions in the software security market, reducing costs and fostering growth opportunities.

The global cybersecurity market is projected to grow at a 12.3% CAGR from 2023 to 2030.

In light of these encouraging trends, let's look at the three Software - Security stocks worth adding to your watchlist, beginning with number 3.

Stock #3: Varonis Systems, Inc. (VRNS)

VRNS provides software products and services that allow enterprises to manage, analyze, alert, and secure their data. The company offers various solutions such as DatAdvantage, DatAlert, Data Classification Engine, DataPrivilege, Data Transport Engine, and DatAnswers. The company sells its products and services through distributors and resellers.

On October 11, 2023, VRNS opened its first local data center in Canada to support new and existing customers shifting to its SaaS offering. This marks the third data center to open recently, showcasing the company's commitment to global data security innovation. The Canada data center will help VRNS comply with national data privacy laws like PIPEDA and Quebec's Law 25.

On September 13, VRNS announced it was enhancing its Salesforce security product by integrating with Salesforce Inc.’s (CRM) Salesforce Shield during Dreamforce 2023. This integration will enable VRNS to leverage Salesforce Shield's activity data to enhance threat detection and investigation capabilities.

The partnership offers real-time data security posture assessment, access control, misconfiguration remediation, and suspicious activity detection, providing comprehensive Salesforce security, potentially leading to VRNS’ increased revenue and customer retention.

During the second quarter ended June 30, 2023, VRNS’ total revenues rose 3.6% year-over-year to $115.42 million. Its gross profit grew 4.7% from the prior-year quarter to $98.03 million. The company reported a non-GAAP net income of $1.09 million, compared to a loss of $106 thousand in the year-ago quarter. Also, its non-GAAP net income per share amounted to $0.01.

In the to-be-announced third quarter, VRNS anticipates revenues of $123.50 million to $127 million, with year-over-year growth of 0% to 3% and non-GAAP operating income of $1 million to $2 million.

For the fiscal year 2023, VRNS projects ARR of $529 million to $535 million, year-over-year growth of 14% to 15%, and free cash flow of $40.0 million to $45.0 million. Its revenues are expected to range from $497.0 million to $503.0 million, with non-GAAP net income per diluted share estimated at $0.21 to $0.23, based on 126.80 million diluted shares outstanding.

According to analysts, VRNS’ revenue is expected to rise 1.8% year-over-year to $125.48 million in the fiscal third quarter that ended September 2023. Its EPS is likely to be $0.03 in the same quarter.

Shares of VRNS have soared 36.3% year-to-date and 24% over the past three months, closing the last trading session at $32.63.

VRNS’ POWR Ratings reflect this promising outlook. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system.

It has a B grade for Quality. It is ranked #8 in the 23-stock Software - Security industry.

Click here for additional VRNS POWR Ratings (Growth, Value, Momentum, Stability, and Sentiment).

Stock #2: Radware Ltd. (RDWR)

Headquartered in Tel Aviv, Israel, RDWR develops, manufactures, and markets cyber security and application delivery solutions for applications in cloud, on-premise, and software-defined data centers worldwide.

On September 26, RDWR entered a million-dollar agreement with one of the top 20 global data center providers. This industry leader chose RDWR's Cloud DDoS Protection Service to safeguard against and prevent volumetric attacks.

RDWR's Cloud DDoS Protection Service offers multi-layered defense against various types of attacks and is supported by a global network of security centers with a 12Tbps attack mitigation capacity. The company is well-regarded in the industry for its cybersecurity solutions and is recognized by prominent industry analysts as a market leader.

On August 29, RDWR teamed up with Spark NZ, a major digital services provider in New Zealand, to provide application and network security services.

This collaboration combines Radware's robust security solutions with Spark's managed security services, ensuring access to the latest expertise and technology while maintaining strict security protocols and compliance standards.

For the fiscal second quarter that ended June 30, 2023, RDWR’s revenues stood at $65.61 million. The company’s non-GAAP gross profit and operating income amounted to $53.97 million and $1.93 million. Its non-GAAP net income and EPS stood at $4.53 million and $0.10, respectively. Its adjusted EBITDA was $4.05 million.

Street expects RDWR’s EPS and revenue in the fiscal year 2024 to rise 52.2% and 2.8% from the previous year to $0.65 and $268.25 million.

The stock has declined marginally intraday to close the last trading session at $16.23.

RDWR’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to a Neutral in our proprietary rating system.

It has a B grade for Quality. Within the same industry, it is ranked #7.

In addition to the POWR Ratings highlighted above, one can access RDWR’s additional Growth, Value, Momentum, Stability, and Sentiment ratings here.

Stock #1: Qualys, Inc. (QLYS)

QLYS provides cloud-based information technology (IT), security, and compliance solutions in the United States and internationally. It serves enterprises, government entities, and small and medium-sized businesses in various industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology, and utilities.

On August 2, 2023, QLYS announced that its industry-leading capabilities, including Qualys Vulnerability Management, Detection, and Response (VMDR), will be included in Mazars’ Cybersecurity Managed Services.

Mazar’s customers will gain unprecedented insights into distinct risk postures to prioritize and remediate their most critical vulnerabilities through this partnership.

QLYS’ revenues increased 14.4% year-over-year to $137.21 million in its fiscal second quarter (ended June 30, 2023). The company’s net income increased 33% year-over-year to $35.38 million, and its net income per share grew 41.8% year-over-year to $0.95.

For the fiscal third quarter, the company anticipates revenues in the range of $140.50 million to $141.50 million, with a 12% to 13% growth over the same quarter in 2022. Non-GAAP net income per diluted share is expected to be between $1.10 to $1.15.

For the fiscal year 2023, QLYS expects revenues between $553 million and $555 million, representing a 13% growth over 2022. Non-GAAP net income per diluted share is expected to range from $4.50 to $4.65.

QLYS’ EPS is expected to rise 20.5% year-over-year to $1.13 in the to-be-announced quarter ended September 2023. Its revenue is expected to increase 12.3% year-over-year to $141 million for the same quarter. Also, the company has exceeded the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 53.9% over the past nine months to close its last trading session at $162.34. It has soared 25.6% over the past three months.

The stock has an overall rating of C, which equates to a Neutral in our proprietary rating system.

QLYS has an A grade for Quality. It is ranked #6 within the Software - Security industry.

Beyond what is stated above, we’ve also rated QLYS for Growth, Value, Momentum, Stability, and Sentiment. Get all QLYS ratings here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

QLYS shares were trading at $163.35 per share on Tuesday morning, up $1.01 (+0.62%). Year-to-date, QLYS has gained 45.55%, versus a 14.45% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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