Jefferies starts coverage of exposure management stocks. Here are their top picks

Investing.com -- Jefferies began coverage of exposure management stocks on Wednesday, citing “reason for optimism” within the sector despite cyclical headwinds.

The investment bank said exposure management is projected to reach $53 billion by 2028, which translates to a compound annual growth rate (CAGR) of 16%.

The firm holds a favorable view on Rapid7 (NASDAQ:RPD), assigning a 'Buy' rating with a price target of $50.

“We favor RPD, which has appealing valuation coupled with the most immediate potential beyond core vulnerability management (VM),” analysts said in the note.

Tenable Holdings (NASDAQ:TENB) and Qualys (NASDAQ:QLYS) were both given a 'Hold' rating, with price targets of $45 and $135, respectively.

Jefferies analysts’ bullishness for the exposure management market is based on its expansion from core vulnerability management to include managing cloud infrastructure risks, detecting suspicious network traffic, providing security operations functions, and collecting logs to stop security attacks.

Analysts highlighted that these areas offer significant opportunities for growth, especially for companies with broader capabilities beyond traditional VM.

Rapid7 was identified as having the most immediate potential for success beyond its core VM. business, which accounts for less than 50% of its operations.

The company’s capabilities in Security Information and Event Management (SIEM) and cloud services were deemed critical for its growth, particularly in the current environment where demand for vulnerability management is cyclical and subject to macro pressures.

Jefferies projects a 3-year revenue CAGR of 7.9% for Rapid7 from 2023 to 2026.

Meanwhile, Tenable is seen as “the most established” name in VM and has a substantial customer base.

The launch of Tenable One, a unified platform, could help offset the cyclical and moderating core revenues. Still, with VM still comprising an estimated 70% of its business, Jefferies views its valuation as fair and forecasts a 3-year revenue CAGR of 10.5%.

Lastly, the investment bank views Qualys as one of the leaders in core VM, however, it expects the company to face challenges in growth until it can capitalize on adjacent markets, which currently make up less than 40% of its business.

“QLYS is focused on investing in S&M, but we expect limited upside especially given that it has the second toughest new business (billings) set-up in our broader cyber coverage for CY25,” Jefferies analysts said.

They project a 3-year revenue CAGR of 7.4% between 2023 and 2026.