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One Cybersecurity Stock Could Rally 45% Before Meeting Resistance, Trader Says

Andrew Kelly | Reuters

Cybersecurity stocks have broken out, surpassing gains in the broader market over the summer.

The BUG cybersecurity ETF has rallied nearly 20% over the past three months — more than double the increase for the S&P 500. Hacking headlines and an increased focus on data security have proven a tailwind for the group.

CNBC's "Trading Nation" on Wednesday asked which of the cybersecurity stocks could lead the next leg of the rally.

Todd Gordon, founder of Inside Edge Capital Management, pinpointed ZScaler as one of his favorite plays in the space.

"It's one of the largest cybersecurity firms out there. They offer cloud-delivered solutions for user device data protection," Gordon said. "The valuation is excessive — it's trading multiple multiple forward earnings — but it's not dissimilar to the other names here."

ZScaler trades at a lofty 483 times forward earnings. The BUG ETF, by comparison, trades at 58 times forward earnings.

"The chart looks solid. It's broken out from $230 resistance which now you look at as support. Based on the current angle of ascent, from current levels we actually are looking at $400," he said.

A move to $400 implies 45% upside from current levels. ZScaler closed Wednesday at $276.71.

"I'm continuing to be bullish despite the crazy valuations," said Gordon.

A different name in the cybersecurity space caught the eye of Delano Saporu, founder of New Street Advisors.

"One of the names of a smaller cap that I like here is Palo Alto Networks," Saporu told "Trading Nation." "We're looking at the strong growth they had from Q3 to Q4. … There was about 34% growth in their billings, which is a strong area."

Palo Alto closed out its fiscal 2021 in July. Full-year profits and revenue rose by roughly 25%.

"They're really focusing on their growth right now, their market growth. Look at their operating expenses. One of their biggest items they're really spending money on is to grow," he said. "When they get to more scale that they're looking for, there'll be opportunity for them to increase [the] bottom line and turn a profit for investors, so right now you're buying for growth."

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