It can be tough to own tech stocks in this market as inflation, rising rates, and supply chain challenges drive investors toward more conservative investments. However, cybersecurity stocks are resistant to most of those macro headwinds because companies generally don't cut their spending on cybersecurity services unless they're going out of business.
The cybersecurity market will also continue to expand over the next decade as increasingly sophisticated cyberattacks prompt organizations to upgrade their aging digital defenses. However, this sector can also be difficult to navigate for investors who don't closely follow cybersecurity companies.
1. Palo Alto Networks
Palo Alto Networks provides on-site firewall appliances, cloud-based security services, and endpoint security services powered by artificial intelligence (AI) to more than 85,000 customers in over 150 countries. It also expanded its newer cloud (Prisma) and AI (Cortex) platforms with big acquisitions in recent years.
Its annual recurring revenues (ARR) from those "next-gen security" (NGS) services rose 65% year over year to $1.6 billion last quarter and accounted for 31% of its trailing-12-month revenue -- compared to 24% a year ago. The growth of its NGS platforms should lock in more customers and reduce its dependence on its legacy firewall-based (Strata) platform.
Palo Alto's revenue and adjusted earnings per share (EPS) grew 25% and 26%, respectively, in fiscal 2021 (which ended last July). For fiscal 2023, it expects its revenue and adjusted EPS to grow about 29% and 21%, respectively.
Palo Alto's stock trades at just nine times this year's sales, so it's still reasonably valued relative to those growth prospects.
In fiscal 2022, its revenue rose 63% to $431 million as its adjusted EPS surged 131%. Its total number of subscription customers jumped 65%, while its existing customers used more of its 22 cloud-based modules.
CrowdStrike's Falcon is a cloud-native endpoint security platform that doesn't require any on-site appliances. It served over 16,000 subscription customers at the end of fiscal 2022, which ended this January, and it's kept its dollar-based net retention rate above 120% since its initial public offering (IPO) in 2019.
CrowdStrike expects to grow its ARR to more than $5 billion by fiscal 2026, which would represent a compound annual growth rate (CAGR) of at least 31% over the next four years as it expands its total addressable market.
For fiscal 2023, it expects its revenue to grow 47%-49% and its adjusted EPS to grow 54%-69%. CrowdStrike is a bit pricier than Palo Alto, at 16 times this year's sales, but its rapid growth justifies that higher valuation.
SentinelOne's Singularity XDR (extended detection and response) platform -- which served over 6,700 customers at the end of fiscal 2022 (ended this January) -- straddles the on-site and cloud-based markets with a mix of virtual appliances and cloud-based services.
But what sets SentinelOne apart is its usage of AI algorithms to process potential threats. It claims that approach makes it faster and more efficient than traditional platforms, which rely on human analysts.
That automated platform has been gaining steam. Its revenue surged 120% to $205 million in fiscal 2022, which ended this January, and it expects 79%-81% growth in fiscal 2023. It's also kept its dollar-based net revenue retention rate above 120% over the past year as it expanded its gross margins.
SentinelOne is still unprofitable, and its stock isn't cheap at 19 times this year's sales. However, it could still emerge as a major disruptor in the cybersecurity market over the next 10 years.
Tenable's Nessus platform proactively scans networks for security threats like misconfigured software, weak passwords, and network flaws. It offers a free version for home users and a paid version that enables companies to scan their entire infrastructure. It currently serves over 40,000 organizations worldwide, including 40% of the Global 2000.
In 2021, Tenable's revenue rose 23% to $541 million as its adjusted EPS surged 79%. In 2022, it expects its revenue to grow 24%-26%, but its adjusted EPS to decline 41%-53% as it ramps up its investments.
Those investments will support the expansion of its ecosystem with newer features like Tenable.ep, which bundles all its risk-based exposure tools, and Tenable.io, its subscription-based cloud platform.
Over the long term, Tenable should continue to expand as companies try to proactively stop cyberattacks. Its stock looks a bit cheaper than its peers, at eight times this year's sales, but I believe it still has a bright future.
* The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by De Angelis & Associates or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity.
Article initially appeared on motleyfool.com
Credit: motleyfool.com, NYSE
© De Angelis & Associates 2022. All Rights Reserved.