In today's ever-evolving digital landscape, the demand for versatile and forward-thinking software companies is more pressing than ever. With the proliferation of mobile-connected devices, electronic communication, social media dominance, and the expanding role of Big Data, the software industry is in a prime position to capitalize on these trends.

Investors are flocking to software stocks that exhibit strong fundamentals, such as Fortinet, Inc. (FTNT), Tenable Holdings, Inc. (TENB), and Trend Micro Incorporated (TMICY). Before delving into the specifics of these companies, let's explore the growth prospects of the software industry.

Organizations are increasingly pushing toward greater efficiency across core applications. This is expected to increase software expenditures. Gartner, Inc. (IT) predicts software spending to increase 14.1% year-over-year to reach $1.05 trillion in 2024.

Moreover, the surge in hybrid work arrangements and increased reliance on cloud services has resulted in a significant uptick in cloud usage. However, with this shift, organizations face a greater risk of breaches and other cybersecurity issues.

As a result, expenditure on public cloud security services is projected to soar from $19.40 billion in 2022 to an impressive $48.90 billion by 2026, demonstrating a robust CAGR of 20.3%.

Furthermore, the international cybersecurity market was valued at $173.50 billion in 2022. It is estimated to expand at an 8.9% CAGR to reach $266.20 billion in 2027.

Now, let's delve deeper into the specifics of the featured Software - Security stocks to uncover their promising potential, starting with the third stock.

Stock #3: Fortinet, Inc. (FTNT)

FTNT offers comprehensive, integrated, and automated cybersecurity and networking solutions globally. Its products include FortiGate hardware and software licenses, FortiSwitch for secure switching solutions, and FortiAP for wireless networking.

On August 3, FTNT introduced FortiGate 90G, a pioneering Secure SD-WAN appliance and NGFW featuring the advanced security processing unit 5 (SP5) ASIC. This innovation brings exceptional AI-driven threat protection performance, scalability, and energy efficiency, all at a competitive cost.

This addition bolsters FTNT’s Secure Networking range, enhancing its capacity to provide uniform security, streamlined management, analytics, and FortiGuard AI-Powered Security Services across hybrid networks.

On June 7, FTNT announced that 11 new Managed Security Service Providers (MSSPs) adopted Fortinet Secure SD-WAN to drive better customer business outcomes and experiences. This move reflects the strong demand for FTNT’s offerings while also helping it stay competitive in the rapidly evolving networking market.

For the fiscal second quarter that ended June 30, 2023, FTNT’s total revenue increased 25.5% year-over-year to $1.29 billion, while its total gross profit increased 27.9% year-over-year to $997 million. Its non-GAAP operating income grew 36.3% from the year-ago value to $348.10 million.

The company’s non-GAAP net income attributable to FTNT came in at $300.40 million and $0.38 per share, representing increases of 54.8% and 58.3%, respectively, from the prior-year quarter.

The consensus revenue estimate of $1.35 billion for the third quarter (ending September 2023) represents a 17.6% increase year-over-year. The consensus EPS estimate of $0.36 for the current quarter indicates a 10.5% improvement year-over-year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.

The stock has gained 29.2% year-to-date and 9.5% over the past month to close the last trading session at $63.17.

FTNT’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

FTNT also has an A grade for Quality. It is ranked #5 out of 22 stocks in the Software - Security industry. Click here to see the other ratings of FTNT for Growth, Value, Momentum, Stability, and Sentiment.

Stock #2: Tenable Holdings, Inc. (TENB)

TENB offers cyber exposure solutions globally, including cloud-based services like Tenable.io and Tenable.cs for assessing security risks across various attack surfaces. They also provide tools like Nessus for vulnerability assessment and Tenable.ot, an operational technology security solution.

On September 7, TENB announced that it is set to acquire Ermetic Ltd., a Cloud-Native Application Protection Platform (CNAPP) provider specializing in Cloud Infrastructure Entitlement Management (CIEM).

This acquisition aims to enhance TENB’s cloud security offerings, providing customers with unified CNAPP capabilities and powerful CIEM solutions to address identity-based threats and improve contextual risk visibility and remediation.

On August 30, TENB introduced web application and API scanning capabilities in Nessus Expert, enhancing vulnerability scanning for modern web apps and APIs, including identifying OWASP Top 10 vulnerabilities and known issues in third-party components. This expansion allows security professionals to assess web applications and APIs for vulnerabilities, improving overall security posture with fewer false positives and negatives.

For the fiscal second quarter that ended June 30, 2023, TENB’s revenue increased 18.7% year-over-year to $195.04 million, while its gross profit increased 18.1% year-over-year to $151.52 million. Its non-GAAP income from operations improved 147.9% from the year-ago value to $30.22 million.

The company’s non-GAAP net income and non-GAAP EPS came in at $26.27 million and $0.22, representing 340.5% and 340% increments from the prior-year quarter, respectively.

TENB’s EPS is estimated to grow 23.2% year-over-year to $0.18 for the fiscal third quarter ending September 2023, while its revenue is projected to reach $198.40 million, registering an increment of 13.5% from the year-ago value. Additionally, it topped the revenue and EPS estimates in each of the trailing four quarters.

The stock has gained 20.3% over the past nine months and 16.4% year-to-date to close the last trading session at $44.42.

TENB’s robust prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.

TENB also has a B grade for Growth, Sentiment, and Quality. It is ranked #2 in the same industry. Click here to see the other ratings of TENB for Value, Momentum, and Stability.

Stock #1: Trend Micro Incorporated (TMICY)

TMICY, based in Tokyo, Japan, develops and sells security software for computers and the internet. It offers hybrid cloud security, intrusion prevention, cloud migration, network defense, security for small and medium-sized enterprises, endpoint security, and 5G security solutions.

On August 22, TMICY expanded its partner program and introduced a new offering, Trend Vision One™ for Service Providers, aimed at empowering MSSPs and MDR companies to enhance their Managed Detection and Response (MDR) and SOC-as-a-service offerings. The new offering could benefit the company.

On June 15, TMICY launched its new Vision One platform, which integrates extended detection and response (XDR), attack surface risk management (ASRM), and zero-trust cybersecurity capabilities. Through this integration, TMICY plans on driving a more efficient system and sets out to accomplish itself in the generative AI space.

TMICY’s net sales for the six-month period ended June 30, 2023, increased 13.5% from the previous year’s period to ¥119.54 billion ($810.96 million), while its operating income stood at ¥18.19 billion ($123.39 million). Its gross profit stood at ¥90.03 billion ($610.79 million), up 12.8% year-over-year.

Net income attributable to owners of the parent amounted to ¥11.86 billion ($80.43 million), and net income per share came in at ¥85.80. Additionally, the company’s cash and cash equivalents at the end of the period increased 5.7% year-over-year to ¥209.22 billion ($1.42 billion).

Street expects TMICY’s revenue to increase 4.9% year-over-year in the current quarter (ending September 2023) to $421.85 million. For the fiscal year 2023, its revenue is projected to reach $1.69 billion, registering a substantial increase of 174.7% from the prior-year period. Its EPS is expected to increase by 12.1% per annum over the next five years.

TMICY shares declined marginally intraday to close the last trading session at $41.74.

It’s no surprise that TMICY has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Stability and a B for Value and Quality. Out of 22 stocks in the same industry, it is ranked first.

In addition to the POWR Ratings we’ve stated above, we also have TMICY’s ratings for Growth, Momentum, and Sentiment. Get all TMICY ratings here.

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FTNT shares were trading at $63.96 per share on Friday afternoon, up $0.79 (+1.25%). Year-to-date, FTNT has gained 30.82%, versus a 17.47% rise in the benchmark S&P 500 index during the same period.

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.

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