Along with the rest of the technology sector, the cybersecurity industry has had a tremendous run in 2023. Since the start of the year, shares of the Global X Cybersecurity ETF (BUG), which tracks a basket of cybersecurity stocks, has rallied nearly 205.
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. But 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 is 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 seven of the best cybersecurity stocks to buy as growth in the industry ramps up.
Data is as of November 10. Analysts' average price targets courtesy of S&P Global Market Intelligence.
- Market value: $11.1 billion
- Analysts' average price target: $91.02 (34.3% implied upside)
Okta (OKTA, $67.77) 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 second quarter ended July 31, revenues jumped by 23% year-over-year to $556 million and free cash flow came to $49 million vs negative $24 million in the year-ago period.
Another reason OKTA is on this list of the best cybersecurity stocks is that the company has over 18,000 customers. In fact, one of the most recent is OpenAI, which is the creator of the hugely successful ChatGPT app.
Okta's platform has the benefit for 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: $39.0 billion
- Analysts' average price target: $57.45 (13.0% implied upside)
At the core of Fortinet (FTNT, $50.82) 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 for not only strong security but 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 the third quarter, revenue shot up by 16% year-over-year to $1.33 billion and service revenue jumped by 27.6% to $680.8 million. Cash flows from operations were $551.2 million.
The company has over 680,000 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: $7.7 billion
- Analysts' average price target: $201.91 (9.8% implied upside)
CyberArk Software (CYBR, $183.95) 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 third quarter, CYBR revenues increased by 25% to $191.2 million. However, the subscription business saw a 65% spike in revenue to $122.9 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.
Palo Alto Networks
- Market value: $78.2 billion
- Analysts' average price target: $278.05 (9.7% implied upside)
Palo Alto Networks (PANW, $253.51) 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 fourth quarter ended July 31, Palo Alto Networks reported a 26% increase in revenue to $2.0 billion. Billings were up 18% to $3.2 billion.
Morgan Stanley analyst Hamza Fodderwala thinks PANW is poised to pull away from the cybersecurity pack and sustain this high-teen billings growth. The analyst has an Overweight rating on PANW stock, which is the equivalent of a Buy, with a $304 price target, representing implied upside of nearly 20% to current levels.
- Market value: $46.9 billion
- Analysts' average price target: $196.29 (0.00% implied upside)
CrowdStrike Holdings' (CRWD, $196.31) 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 second quarter, the company's revenue jumped 37% year-over-year to $731.6 million and free cash flow was $188.7, up from $135.8 million in the previous quarter. It also has $3.17 billion in the bank.
CrowdStrike's "land and expand strategy" has been working quite well. The adoption rate for five or more modules is 63%, and 24% 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 $97.8 billion by 2025.
- Market value: $4.62 billion
- Analysts' average price target: $19.24 (22.7% implied upside)
Founded in 2013, SentinelOne (S, $15.68) is a pioneer in using AI for cybersecurity. The platform is called Singularity XDR and it has various autonomous capabilities. These include providing real-time monitoring for all endpoints, IoT, cloud containers and cloud workloads. Singularity XDR also has comprehensive remediation systems.
The AI-first strategy has made S one of the best growth stocks. During its fiscal second quarter, revenue soared 46% to $149.4 million and the customer base rose by 30% to over 11,000. The number of customers with ARR (Annual Recurring Revenue) of more than $100,000 grew by 37% to 994.
A key factor to the success of the go-to-market strategy has been partnerships with Managed Security Service Providers (MSSPs). These organizations are becoming critical in helping customers manage the complexities of cybersecurity. They also generally have large customer bases and focus on best-of-breed technologies.
Building an ecosystem of MSSPs is no easy feat. In other words, SentinelOne's base is a valuable competitive advantage. And as a result, S will likely keep showing up on these lists of the best cybersecurity stocks to buy for years to come.
- Market value: $16.0 billion
- Analysts' average price target: $186.19 (6.4% implied upside)
Founded in 2007, Zscaler (ZS, $175.04) 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 artificial intelligence (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 fourth quarter ended July 31. Zscaler reported revenue of $455.0 million, up 43% on a year-over-year basis. The company's free cash flow was $101.3 million and it had $2.1 billion in the bank.
A critical factor for the growth has been Zscaler'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.
Tom Taulli has been developing software since the 1980s when he was in high school. He sold his applications to a variety of publications. In college, he started his first company, which focused on the development of e-learning systems. He would go on to create other companies as well, including Hypermart.net that was sold to InfoSpace in 1996. Along the way, Tom has written columns for online publications such as Bloomberg, Forbes, Barron's and Kiplinger. He has also written a variety of books, including Artificial Intelligence Basics: A Non-Technical Introduction. He can be reached on Twitter at @ttaulli.
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