2 High-Growth Cybersecurity Stocks to Buy
While the COVID-19 pandemic has accelerated the pace of digital transformation in the world, it has also resulted in a dramatic rise in the frequency and cost of cybercrimes. According to VentureBeat, the number of internet attacks globally rose from 32.5 million in 2021 to 35.4 million in 2022. The global cost of cybercrimes has also exploded from $6 trillion to $8.4 trillion in the same time frame.
In this elevated threat environment, cybersecurity has become mission-critical for the smooth functioning of enterprise and government operations. Zscaler (ZS -1.81%) and CrowdStrike (CRWD -0.24%) have been benefiting from this trend and can prove to be relatively safe choices for retail investors in the current volatile high-interest-rate environment.
Here's why these stocks are worth buying in April 2023.
Gone are the days when enterprise servers and data centers could be effectively protected by firewalls. With enterprises increasingly opting for multi-cloud infrastructure and remote working arrangements, the attack surface for cyber threats has increased dramatically.
Zscaler is helping tackle these elevated challenges of cloud and network security with its Zero Trust Exchange platform -- the largest online cloud-based security platform in the world. Here, the software considers every user to be hostile and verifies the identity and context of the user/workload/device for every access request to an enterprise resource (data or network). Zero Trust Exchange helps prevent 9 billion security violations on a daily basis.
Zscaler is currently experiencing weaker-than-expected billings growth (considering seasonal impacts), mainly due to the elongation of the sales cycle amid increased budget scrutiny. However, this problem may mostly resolve in a few months since the company has been offering larger subscription commitments to some new customers, which allows for lower billings upfront and higher billings later. Hence, the company is focusing on attracting and retaining customers in the long run at the cost of near-term billings growth.
Zscaler surpassed consensus revenue and earnings estimates in the second quarter (ending Jan. 31, 2023). The company has guided for revenue of around $1.56 billion for fiscal 2023 (ending July 31, 2023), up 43% on a year-over-year basis. Zscaler is also prioritizing profitability and reported a 2 percentage point year-over-year expansion in adjusted operating margin to 12% in the first half of fiscal 2023.
Zscaler's stock is still down by around 54% year over year. So considering its compelling long-term growth prospects, now may be an excellent time to invest in this cybersecurity company.
CrowdStrike is a leading player with a 17.7% market share in endpoint security (securing end-user devices such as mobiles, tablets, and laptops that serve as access points for enterprise networks). With 90% of successful cybersecurity attacks originating at the endpoint, the importance of effective endpoint security is undebatable.
Besides endpoint protection, the company's cloud-native Falcon platform (comprising 23 modules) also offers a range of security services such as identity protection, cloud workload protection, and observability. Falcon leverages artificial intelligence and machine learning to recognize and respond to potential cyber threats. The platform enjoys strong network effects since every new cyber threat (of the trillions intercepted on a weekly basis) makes the system smarter, which further helps attract new customers.
CrowdStrike has been quite successful in attracting new customers as well as in cross-selling additional modules to existing customers. The company's subscription customers grew 41% year over year to 23,019 in fiscal 2023 (ending Jan. 31, 2023). Further, 62% of the company's customers used five or more modules at the end of fiscal 2023, up from 57% a year ago. The increasing adoption of Falcon has helped CrowdStrike build a loyal customer base -- apparent from its customer retention rate of 98% and dollar-based net retention rate of over 120% in fiscal 2023.
CrowdStrike currently serves almost 25% of the Global 2000 enterprise customers. To further bolster its growth, the company is now focusing on expanding its presence in the mid-market and small and medium business segments.
CrowdStrike is guiding for annual recurring revenue (ARR) of $5 billion or more by fiscal 2026. This goal seems achievable considering that the company grew its ARR by 48% year over year to $2.56 billion in fiscal 2023 -- a year marked by significant macroeconomic uncertainty and a slowdown in corporate spending. The company is not yet profitable but is free-cash-flow positive.
Currently trading at 14 times sales, CrowdStrike is close to the lowest it has traded as a public company. Coupled with solid growth prospects, CrowdStrike seems to be a solid stock to buy for long-term investors.
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