Investing in cybersecurity offers investors some critical benefits that many overlook. While it does not act as the face of the tech sector, technological advancement is not possible without the protection this sector provides.
Moreover, because it is so critical, it has avoided some of the severe slowdowns that many tech stocks suffered in the technology bear market of 2022. Considering that growth, investors need to watch this sector closely, and three cybersecurity stocks appear especially poised to drive significant returns.
1. CrowdStrike
CrowdStrike (CRWD 2.15%) provides 23 different cloud modules geared toward cybersecurity. While such offerings are not necessarily unique to the industry, CrowdStrike stands out with Falcon, its offering that uses crowdsourced data to identify threats.
It also has emerged as a leader in endpoint security. That endpoint product attracts new customers, and existing customers tend to add additional products that enhance security. About 62% of its customer base uses at least five of its modules.
The rising popularity of its offerings meant net dollar retention stayed above 120% throughout the year, meaning existing customers increased spending on the platform by more than 20% over the last year. Moreover, gross retention stood at more than 98%, meaning that percentage of existing customers stayed with the platform.
With such results, the supercharged Nasdaq stock achieved revenue growth of more than $2.2 billion in 2022, 54% higher than in 2021. Crowdstrike's cost of revenue grew faster than the revenue itself, and it took an income tax cost reduction and an infusion of interest income to prevent losses from increasing. Hence, for 2022, losses came in at $182 million, down from $232 million the year before.
Like most other tech stocks, CrowdStrike stock experienced a massive decline since late 2021. And while its price-to-sales (P/S) ratio of 14 may seem high, it is well below the 60 P/S ratio of early 2021. That discounted multiple and its growth could persuade investors to take a chance on this emerging cybersecurity company.
2. Zscaler
Like CrowdStrike, Zscaler (ZS 4.82%) stands out for spearheading a unique approach to cybersecurity. The company created the "zero trust exchange," meaning it assumes everyone on a network is a security threat until proven otherwise. Criteria to determine whether one gets into a network include one's place in an organization and the device used. And even if they get in, it only grants access to a needed application rather than an entire network. That limits the damage caused if a hostile party gains access.
Additionally, this cloud-based provider operates on the edge, allowing faster response times to threats. This Zscaler secure access service edge (SASE) reduces latency and removes much of the need for backhauling.
Company financials show the growing popularity of this approach. In the first two quarters of fiscal 2023, Zscaler reported $579 million in revenue, 54% more than in the same period in 2021. That is only slightly below the 62% year-over-year growth reported in fiscal 2022. Also, because cost and expense growth lagged behind the revenue increase, the net losses in the first six months of fiscal 2023 came to $126 million, down from $191 million in the same year-ago period.
Also, amid the brutal sell-off since late 2021, Zscaler has become more affordable. Its P/S ratio of about 12 is near record lows and well below the peak of 64 in October 2021. Given the rate of revenue and falling losses, that valuation could serve as a buy signal in this continuing growth story.
3. Palo Alto Networks
Palo Alto Networks (PANW 5.57%) takes a more generalized approach to cybersecurity than most of its peers. Instead of becoming best known in one particular area, it simultaneously focuses on three areas: network security, cloud security, and security operations.
Through this approach, Palo Alto has become a recognized leader in 13 industry categories, up from nine in 2022. It has also attracted interest from large organizations. Palo Alto's fastest-growing category in the second quarter of fiscal 2023 (ended Jan. 31) was in deals amounting to more than $10 million. This increased by 144% year over year, with the total value of these deals rising by 196%.
Overall, revenue for the first six months of 2023 surged 26% higher to $3.2 billion. This was a slight slowdown from fiscal 2022 when revenue rose 29%. With a slower rate of increase in costs and expenses, Palo Alto turned profitable as the company earned $104 million in net income in the first two quarters of fiscal 2023.
Additionally, Palo Alto has staged a huge recovery since the year began, and its stock is down by only 4% over the last year. Although that took its P/S ratio back to 10, it remains a cheaper stock than many of its competitors. Considering its leadership in multiple security categories and appeal to larger customers, the recent upward move in the stock likely makes Palo Alto a top cybersecurity stock to buy right now.
