With growing digitization, cyberattacks are becoming more prevalent and more sophisticated. Now, technological innovations in artificial intelligence have highlighted the importance of data to businesses. Thus, given the cyber-attack threats, securing data and network infrastructure will be essential. As a result, cybersecurity stocks will benefit from these trends.
Despite the current macro pressures, the sector continues to enjoy healthy demand. The rise in nefarious state actors and rogue individual groups has heightened businesses’ security needs. At the same time, the addressable market in cybersecurity has expanded. According to McKinsey & Company, cybersecurity stocks have up to a $2 trillion market opportunity.
In the coming decade, organizations must proactively secure their information systems. If not, they risk losing trade secrets, compromising customer information or causing significant disruption to operations.
Plus, companies that expose customer data to breaches risk losing clients overall. As a result of these threats and increased regulation, cyber spending is becoming a mandatory item in company budgets.
Given the heightened demand for sophisticated solutions, major players will thrive. Here are the best cybersecurity stocks to buy.
Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) has one of the best combinations of growth and profitability among high-return cybersecurity stocks. It has grown revenues at a 25% compounded annual growth rate (CAGR) since 2008. What’s more remarkable is that the company has achieved this while maintaining higher free cash flow margins than peers.
For this Sunnyvale, California-based company, the prospects have never been better. Employees are pushing for remote work worldwide, and some companies are acquiescing to at least hybrid work. As a result, the demand for work-from-home security solutions like secure access service edge (SASE) and software-defined wide area network (SD-WAN) is accelerating.
The company is taking advantage of the convergence of networking and security. Its main product bundles various networking and security functions, including firewall, anti-malware, VPN, intrusion prevention, application control, anti-spam, web filtering and WAN acceleration.
Fortinet’s core strength is in SD-WAN and network firewalls. Essentially, their firewalls provide a layer of protection that inspects internet traffic and prevents hacks. And its SD-WAN solutions enable a secure connection to a network over the cloud.
In terms of profits, Fortinet has been a consistent performer compared to other cybersecurity stocks. Over the last three years, GAAP operating margins have been over 15%.
Given the solid demand expectations, management provided lofty targets in their investor day presentation in June. They expect to compound revenues at 22% annually over the next three years and hit $10 billion by 2025. Additionally, they target a 25% operating margin and a free cash flow margin in the mid to high 30% range.
The markets appreciate Fortinet’s consistent growth and profits. No wonder the stock has surged more than 50% year-to-date (YTD). Expect this momentum to continue as the company continues to deliver solid fundamentals.
CrowdStrike (CRWD)
Led by co-founder George Kurtz, this cloud-native cybersecurity stock expects there to be an addressable market for its offerings of almost $100 billion over the next three years. In cloud security, it’s evident that CrowdStrike (NASDAQ:CRWD) is dominating the market.
The CEO has openly talked about wins against peers. In a Q1 fiscal year 2024 earnings call, he stated, “The competitive environment has not changed since our deep dive in April, where we disclosed that eight out of 10 times when an enterprise customer tests, they choose CrowdStrike over Microsoft (NASDAQ:MSFT) and our win rates across all competitors remained strong in the quarter.”
Even global market research firms have recognized CrowdStrike’s technology advantage. Recently, Forrester named CrowdStrike a leader in Managed Detection and Response (MDR).
Due to its competitive advantage, CrowdStrike has been winning many enterprise deals. As a result, its revenues are growing faster than most peers. In Q1 FY2024, revenues were $692.6 million, growing 42% year-over-year (YOY). Also, annual recurring revenue increased 42% YOY and ended the quarter at $2.73 billion.
The company is growing profitably and maintaining healthy margins. GAAP subscription margin was 78% and improved from the previous year’s 77%. Free cash flow increased from $157.5 million in Q1 FY2023 to $227.4 million.
Looking ahead, the company is leveraging AI to improve its security solutions. For instance, it launched Charlotte AI, a generative AI security tool. Additionally, it is collaborating with AWS to design AI applications to help customers secure their cloud data and infrastructure.
Considering the technology leadership and urgency of security, CrowdStrike is among the top cybersecurity stocks to buy. Analysts agree and expect over 20% upside from current prices.
Zscaler (ZS)
Zscaler (NASDAQ:ZS) protects customers through their cloud-native Zero Trust Exchange. The platform enables secure connection of users and devices from any location. It has been a leader in zero trust, and Gartner has named it a leader in the Security Service Edge (SSE) market.
Demand for zero-trust architectures in security will only surge going forward. Zscaler architecture processes over 300 billion transactions daily. Therefore, the company has built a powerful proxy through years of threat detection and model improvement.
That’s why it’s among the highest-rated cybersecurity stocks by analysts. After the Zenith conference, Wedbush Securities recently cited the firm’s advantage. Analyst Taz Koujalgi noted that numerous customers were adopting and deploying Zscaler Private Access (ZPA). The consensus view is also bullish, with an average price target of $172. As of this writing, that represents a 20% upside.
Zscaler has focused on U.S. federal government agencies as part of its growth strategy. In August 2022, the company received one of the highest U.S. government certification requirements. Drew Schnabel, Vice President of Federal at Zscaler, highlighted this achievement, “This FedRAMP High authorization elevates Zscaler and our support of the U.S. government as currently the only cloud security company with two FedRAMP High JAB authorizations in the market.”
Zscaler is eliminating the need for firewalls and MPLS network services. As a result, revenues are booming, with 20% YOY growth in new logos in Q3 FY2023. Additionally, management expects strong double-digit revenue growth for the year. ZS stock is in growth mode and hence a buy.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
