Inflation, rising interest rates, and other macro headwinds deflated the valuations of many tech stocks over the past year as investors retreated toward more conservative investments. However, the cybersecurity sector broadly resisted that sell-off for a simple reason: Most companies won’t lower their digital defenses just to save a few dollars.
According to Fortune Business Insights, the global cybersecurity market could still expand at a compound annual growth rate (CAGR) of nearly 14% from 2023 to 2030 as cyberattacks become more frequent and more devastating. Investors who want to capitalize on that secular trend should consider investing in these three cybersecurity stocks: Fortinet (FTNT -1.44%), Palo Alto Networks (PANW -1.22%), and CrowdStrike (CRWD -1.17%).
Fortinet launched its first next-gen firewall (NGFW), which upgrades traditional firewalls with network device filtering tools, more than two decades ago. It subsequently expanded that firewall, FortiGate, into a “Security Fabric” of end-to-end security services for cloud-based services, on-premise hardware, and Internet of Things devices. Fortinet now serves over 660,000 customers worldwide, including most of the Fortune 500, making it one of the world’s largest cybersecurity companies. But despite its size and age, it’s still consistently generating double-digit revenue and earnings growth.
Fortinet expects its revenue to grow 23% to 24% in 2023, even as the macro headwinds force companies to rein in their spending. It expects its adjusted earnings per share (EPS) to rise 21% to 24%. Over the long term, it believes the convergence of the cybersecurity and networking markets will drive more customers to use its custom hardware and operating system — which work together to unite fragmented networks into a single ecosystem. Fortinet also differentiates itself from other cybersecurity companies by developing its own custom ASIC chips — which are more efficient than central processing units (CPUs) — for its hardware and operating system.
Fortinet’s stock isn’t cheap at 48 times forward earnings. But its consistent growth, clear vision for the future, and development of custom hardware and software all justify that higher valuation. Unlike many other high-growth cybersecurity companies, Fortinet is also profitable on a generally accepted accounting principles (GAAP) basis.
2. Palo Alto Networks
One of Fortinet’s top competitors in the NGFW market is Palo Alto Networks. Like Fortinet, Palo Alto expanded its firewall into a much larger ecosystem. Today, Palo Alto operates three main platforms: Strata for its NGFW and on-site network security tools, Cortex for its artificial intelligence-powered threat detection services, and Prisma for its cloud-native security services.
Palo Alto now serves more than 61,000 active customers worldwide, including all of the Fortune 100 and most of the Global 2000. But just like Fortinet, Palo Alto continues to generate double-digit revenue and earnings growth.
For fiscal 2023 (which ends this July), Palo Alto expects its revenue to rise 25% to 28% and for its adjusted EPS to grow 69% to 70%. It has also stayed profitable on a GAAP basis over the past four quarters. It attributes most of its growth to the expansion of Cortex and Prisma, which accounted for 40% of its trailing 12-month revenues. For fiscal 2024, analysts expect its revenue and adjusted EPS to rise 22% and 16%, respectively. Palo Alto’s stock isn’t a bargain at 44 times forward earnings, but I believe its diversification, scale, and rising GAAP profits all make it a promising investment.
Fortinet and Palo Alto Networks both install on-site appliances to power some of their services. But those appliances are expensive, take up lots of space, consume plenty of power, and are difficult to scale as an organization expands. CrowdStrike addresses that problem with Falcon, a cloud-native platform which doesn’t require any on-site appliances. That lightweight approach is easy to scale and enables it to lock in its customers with sticky cloud-based subscriptions.
CrowdStrike served 23,019 subscription customers at the end of fiscal 2023 (which ended this January), compared to its 5,431 customers at the end of fiscal 2020. For fiscal 2024, the company expects its revenue to rise 34% to 36% and for its adjusted EPS to rise 50% to 57%. Those growth rates are robust, but they would mark a significant slowdown from its 54% revenue growth and 130% adjusted EPS growth in fiscal 2023.
CrowdStrike’s growth is cooling off in this tough macro environment, but it’s approaching GAAP profitability and its customers are still adopting more of its modules. It also plans to nearly double its annual recurring revenue (ARR) from $2.56 billion in fiscal 2023 to $5 billion in fiscal 2026, which implies its ARR could rise at a CAGR of 25% over the next three years. Its stock might seem pricey at 63 times forward earnings, but its cloud-based services could still have plenty of room to expand.
Leo Sun has positions in CrowdStrike and Palo Alto Networks. The Motley Fool has positions in and recommends CrowdStrike, Fortinet, and Palo Alto Networks. The Motley Fool has a disclosure policy.