Along with the rest of the technology sector, the cybersecurity industry has had a tremendous run over the past 12 months. As evidence, shares of the Global X Cybersecurity ETF (BUG), which tracks a basket of cybersecurity stocks, has rallied nearly 27% in that time frame.
Still, there's plenty of opportunity for investors, especially for those with a long-term perspective. For the most part, the growth prospects for cybersecurity stocks remain strong.
According to a survey from Gartner, chief information officers say that cybersecurity is the highest priority. Roughly 80% have noted that they plan to increase spending in 2024.
But this should not be a surprise. The digital threat environment is getting worse, such as with phishing attacks and ransomware. However the emergence of artificial intelligence (AI) systems like ChatGPT have made the attacks even tougher to fend off. For example, hackers can use this technology to craft more convincing phishing emails – or even to create malware.
"Attacks continue to rise in frequency and are getting sophisticated," said Tejas Dessai, AVP and research analyst at Global X. "All these tailwinds are helping cybersecurity spending expand – even as we're entering a broad slowdown in terms of spending on IT. Government intervention and action are also presenting strong tailwinds to cyber spending. Not only is the government spending out of its own pocket, but it is also pushing vendors and large infrastructure providers to step in and ensure online safety for small businesses and consumers."
So which cybersecurity stocks stand to benefit? And which look attractive right now?
We've compiled a list of six of the best cybersecurity stocks to buy as growth in the industry ramps up. To come up with our list of the best stocks to buy in this industry, we focused on companies that are expected to average double-digit earnings-per-share growth each year for the next three to five years, according to S&P Global Market Intelligence. This makes them ideal long-term investment stocks.
- Market value: $51.7 billion
- Analysts' consensus long-term EPS growth estimate: 14.9%
At the core of Fortinet (FTNT, $68.31) is a comprehensive system to secure networks. The solutions include firewalls, intrusion prevention systems, data leak prevention, virtual private networks (VPNs) and secure web gateways. These provide not only strong security but also improved network performance.
Besides these technologies, Fortinet also has offerings like encryption applications, universal zero trust network access, and security for LANs (Local Area Networks) and WLANs (wide-area networks).
"What Fortinet does well is that it offers multiple security functions on one platform at an attractive price as a bundle," said Hendi Susanto, portfolio manager at Gabelli Funds.
In 2023, revenue rose 20% year-over-year to $5.3 billion and service revenue jumped 28% to $3.4 billion. Cash flows from operations were $1.9 billion.
The company has over 730,000 customers. These include a majority of the companies in the Fortune 500 and the Global 2000.
Over the years, Fortinet has invested heavily in its AI solutions, including using sophisticated algorithms to process more than 100 billion cyber events every day. This has allowed for better real-time prevention of breaches, as well as improved remediation.
For investors seeking out the best cybersecurity stocks, FTNT is worth a closer look.
- Market value: $11.2 billion
- Analysts' consensus long-term EPS growth estimate: 22.4%
CyberArk Software (CYBR, $265.63) is a developer of identity security systems. Its solutions include single sign-on, multi-factor authentication, directory services and lifecycle management. These are available on-premises, the cloud and the hybrid cloud. There is also a rich set of solutions for analytics.
For the fourth quarter, CYBR revenue increased by 32% to $223.1 million. However, the subscription business saw a 70% spike in revenue to $150.3 million. In other words, the company's cloud strategy is getting lots of traction.
Currently, CyberArk has more than 8,000 customers across 110 countries. Its customer base includes more than half the Fortune 500 and about 35% of the Global 2000.
A strong identity system is certainly a must-have for security and CyberArk's solution has the kinds of functions that enterprises need.
"We are the only company with an Identity Security platform that can offer our customers the flexibility to provide standing access, just in time access or zero standing privileges, depending on the type of identity and the nature of the target they need to access," said CEO Matt Cohen in CyberArk's third-quarter earnings call. "What differentiates our platform even further is that we can do this across hybrid and cloud native environments."
This is why CyberArk is one of the best cybersecurity stocks around.
- Market value: $91.7 billion
- Analysts' consensus long-term EPS growth estimate: 24.8%
Palo Alto Networks (PANW, $284.13) is one of the world's largest providers of cybersecurity solutions. The company's software and hardware allows for sophisticated network security, secure access service edge (SASE) and cloud security. There is also threat intelligence consulting.
With Palo Alto Networks' massive scale, the company is able to invest about $1 billion in research and development (R&D) each year. This is two to five times what its pure-play rivals spend. The R&D investments mean that the company has released a large number of updates, upgrades and new systems.
And these investments are paying off for one of Wall Street's best cybersecurity stocks. In its fiscal second quarter ended January 31, Palo Alto Networks reported a 19% increase in revenue to $2.0 billion. Billings were up 16% to $2.4 billion.
Morgan Stanley analyst Hamza Fodderwala thinks the spending environment remains healthy and that PANW's competitive positioning remains strong. The analyst has an Overweight rating on PANW stock, which is the equivalent of a Buy, with a $360 price target, representing implied upside of nearly 27% to current levels.
- Market value: $17.5 billion
- Analysts' consensus long-term EPS growth estimate: 28%
Okta (OKTA, $111.49) is a leading developer of technologies for identity, which allows for secure access, authentication and automation. This is for a variety of systems like cloud and mobile apps, on-premises servers and APIs (Application Programming Interfaces).
While there are big competitors in the identity market, including blue chip stock Microsoft (MSFT), Okta has the advantage of being neutral. It does not sell any other software that might compete with customers.
Okta has also built a strong ecosystem. The company currently boasts about 7,000 pre-built integrations.
There are secular trends that are driving Okta's business. The move to a hybrid workforce means there is demand for securing external systems and applications.
Another important trend is Zero Trust security. This assumes that an organization will be compromised and that cybersecurity systems need to be more comprehensive, such as with response and recovery to breaches.
Not surprisingly, growth has been robust for Okta. During its fiscal fourth quarter ended January 31, revenue jumped by 19% year-over-year to $605 million and free cash flow came to $166 million vs $72 million in the year-ago period.
Another reason OKTA is on this list of the best cybersecurity stocks is that the company has nearly 19,000 customers. One of the most notable is OpenAI, which is the creator of the hugely successful ChatGPT app.
Okta's platform has the benefit of extension into new market categories, such as with SIEM (Security Information and Event Management). In other words, there should be continued momentum for years to come.
- Market value: $28.9 billion
- Analysts' consensus long-term EPS growth estimate: 40.2%
Founded in 2007, Zscaler (ZS, $192.63) is one of the early players in the cloud-based cybersecurity market. The company's core platform is the Zscaler Zero Trust Exchange. It is an alternative to the traditional approach to cybersecurity, which has focused on on-premise corporate networks.
The Zscaler Zero Trust Exchange has multiple benefits. It allows users to have secure and reliable access to cloud applications. Additionally, the technology secures workloads for the public cloud and private cloud. And there is also a system for protecting IoT (Internet-of-Things) devices.
The underlying foundation of the Zscaler Zero Trust Exchange is massive. Every day, it processes more than 320 billion transactions and prevents 9 billion security violations. This data – which gives off from more than 500 trillion signals – has been invaluable for leveraging AI and machine learning. It's also why in addition to being one of Wall Street's best cybersecurity stocks, ZS also tends to pop up on lists of the best AI stocks.
In the fiscal second quarter ended January 31, Zscaler reported revenue of $525.0 million, up 35% year-over-year. The company's free cash flow was $100.8 million vs $62.8 million the year prior and it had $2.5 billion in the bank.
A critical factor that has made ZS one of the best growth stocks has been the company's innovation. In the latest major release of its cloud software, there were more than 150 new features.
The focus on innovation has led to strong customer loyalty. Consider that the Net Promoter Score (NPS) – which shows whether a customer will recommend a product – for ZS is above 80. This is more than two times the average for SaaS (software-as-a-service) companies.
- Market value: $77.5 billion
- Analysts' consensus long-term EPS growth estimate: 43.8%
CrowdStrike Holdings' (CRWD, $320.59) cybersecurity platform is called Falcon. It's a cloud-native system that processes huge amounts of data to detect attacks and remediate breaches in real-time. This has been key for leveraging AI. The more data ingested, the smarter the system gets. Falcon also has 23 cloud modules that offer workload security, identity protection, log management, data protection and vulnerability management.
Even with the macroeconomic headwinds, CRWD has continued to grow at an impressive rate. In its fiscal fourth quarter ended January 31, revenue jumped 33% year-over-year to $845.3 million and free cash flow was $283.0 million, up from $209.5 million in the previous quarter. It also has $3.5 billion in the bank.
CrowdStrike's "land and expand strategy" has been working quite well. The adoption rate for five or more modules is 64%, and 27% for seven or more modules.
There is also plenty of room for long-term growth for this top cybersecurity stock. CRWD pegs the addressable market opportunity is roughly $100 billion by the end of this calendar year. And analysts for their part anticipate average annual earnings per share growth of nearly 44% over the next three to five years.
