How to Invest in Arctic Wolf

Arctic Wolf, a privately held cybersecurity firm in Eden Prairie, Minnesota, may be one of the sector's most-anticipated initial public offerings within the next year or two. The company raised $7.2 million when it was created in 2012. Since then, the company has gone through eight more funding rounds, raising almost $900 million, and it currently enjoys a $4.3 billion valuation. Read on to find out more about the company and its prospects for going public.

Is it publicly traded?

Is Arctic Wolf publicly traded?

Arctic Wolf is a cybersecurity firm that offers security operations as a concierge service that detects advanced threats and manages risks across healthcare, financial services, legal, manufacturing, government, and other sectors.

You can't buy Arctic Wolf stock at the moment since it's privately held. But the company has emerged as one of the potentially biggest cybersecurity stocks that could hit the initial public offering (IPO) calendar in the next year or two.

Cybersecurity stocks have been described as "a red-hot niche of the tech industry," and the sector is expected to grow about 10% annually this year, with global spending estimated at $208 billion. Although Arctic Wolf is far from the only company specializing in managed detection and response (MDR), it's won accolades and registered lightning-fast growth during its relatively short life.

Major investors in Arctic Wolf include Owl Rock Capital, Lightspeed Venture Partners, Viking Global Investors, Neuberger Berman, and the Ontario Teachers' Pension Plan.

As a privately held company, Arctic Wolf isn't required to disclose financial information. However, the company said in 2021 that it was generating annual recurring revenue of $200 million.

When will it IPO?

When will Arctic Wolf IPO?

Although it's been on the list of potential initial public offerings for a couple of years, Arctic Wolf doesn't plan to go public just yet. In an interview with the Financial Times, CEO Nick Schneider said the company is waiting to see if interest rates begin to fall and tech stocks start to rise again before launching an IPO.

"It's the confluence of those things that will give folks confidence that an IPO will be successful and continue to be successful afterwards," Schneider told the newspaper.

How to invest

How to buy Arctic Wolf stock

Since it's a privately held company, you can't buy shares of Arctic Wolf with a brokerage account just yet. However, there are several alternatives in the cybersecurity sector that potential Arctic Wolf investors might want to consider.

Here are three:

1. CrowdStrike

As a leader in the cybersecurity space, CrowdStrike (CRWD 2.03%) has lapped the field when it comes to share performance. Since its 2019 IPO, the company's stock has returned almost 350%, and it expects the market for its products to expand to $225 billion by 2028.

During the company's third-quarter earnings call, management said the number of clients using at least eight of its modules increased by 78% year over year. CrowdStrike currently claims annual recurring revenue of a little more than $3 billion; it sees that figure rising to $10 billion within the next five to seven years.

If there's one strike against the company, it's that CrowdStrike is a growth stock, which means it's highly volatile. Even so, the growth of the cybersecurity industry and the potential of artificial intelligence (AI) to boost the industry make it a strong option for buy-and-hold investors.

2. Okta

The San Francisco-based cybersecurity specialist suffered last year from concern over major data breaches, and its acquisition of Auth0, an authentication and authorization service, proved more expensive than anticipated.

Even so, Okta (OKTA -0.69%) reported revenue figures that topped projections in the third quarter, and it forecast growth of only 10% for the year ending in January 2025. Although it's still operating at a loss, those losses fell to only 19% of sales, and it generated a record $150 million of free cash flow during the last quarter.

It's likely that Okta and other companies may struggle as a result of a new Securities and Exchange Commission requirement that companies report cyberattacks within four days if they're suspected of causing a material impact. Still, the company may be poised to take advantage of secular trends like generative AI.

3. Palo Alto Networks

Palo Alto Networks (PANW 0.91%) is one of the bigger players in the cybersecurity market. It's also one of the top performers, with stock prices rising more than 150% in barely a year. Indeed, share prices have risen so quickly that the company might split its stock for the second time in three years.

Like other cybersecurity firms, Palo Alto is poised to benefit from the industry's growth. Research and consulting firm Gartner (IT 0.55%) has cited it as a leader in software-defined wide area network (SD-WAN) technology. Only about 30% of companies were using SD-WAN technology in 2020, but the company believes the figure will double by the end of this year.

Palo Alto recorded its first annual net profit in 2023, with $440 million in full-year net income. Revenue grew 25% even as operating expenses rose nearly 16%. Like any other cybersecurity stock, it's likely to be volatile, but its 25% year-over-year revenue growth is outpacing industry growth.

Investors who want to buy one of these Arctic Wolf alternatives can purchase shares with any brokerage account. Here's a step-by-step guide on how to invest in stocks like Arctic Wolf.

Step 1: Open a brokerage account

You'll need a brokerage account to start investing. If you need to open one, here are some of the best-rated brokers and trading platforms. Take your time to research the brokers to find the best one to meet your needs.

Step 2: Figure out your budget

Before making your first trade, you'll need to determine a budget for how much money you want to invest. You'll then want to decide how to allocate that money.

The Motley Fool recommends building a diversified portfolio of 25 or more stocks you plan to hold for at least five years. You don't have to buy all those stocks at once. For example, if you have $1,000 available to start investing, you might want to begin by allocating that money equally across at least 10 stocks. You can then grow your portfolio from there as you have more money to invest.

Step 3: Do your research

It's essential to thoroughly research a company before buying its shares. You should learn about how it makes money, its competitors, its balance sheet, and other factors to make sure you have a solid grasp on whether the company can grow value for its shareholders over the long term.

Step 4: Place an order

Once you've opened and funded a brokerage account, set your investing budget, and researched the stock, it's time to buy shares. The process is relatively straightforward. Go to your brokerage account's order page and fill out all the relevant information, including:

• The number of shares you want to buy or the amount you want to invest to purchase fractional shares.
• The stock ticker (CRWD for CrowdStrike, OKTA for Okta, and PANW for Palo Alto).
• Whether you want to place a limit order or a market order. The Motley Fool recommends using a market order since it guarantees you buy shares immediately at the market price.

Once you complete the order page, click to submit your trade and become a shareholder in one of these Arctic Wolf alternatives. If Arctic Wolf ever does complete an IPO, you'd follow a similar process to buy its stock if it went public. Should shares become available, fill out the order page at your brokerage account with Arctic Wolf's selected stock ticker and then submit your trade.

Profitability

Is Arctic Wolf profitable?

Since it's a privately held company, Arctic Wolf doesn't have to publicly report its financial results. However, it's probably safe to say that it's doing well. Revenues shot up more than 4,300% between 2016 and 2020, and the company has been named to the Deloitte Technology Fast 500™ for the fifth consecutive year.

Arctic Wolf has also been named to CNBC's Disruptor 50 list for the last three years, and it's been recognized by Forbes as one of the top 100 private cloud companies. It now has regional offices in four states and eight countries, as well as more than 5,000 customers in 30 countries.

Should I invest?

Should I invest in Arctic Wolf?

Since it's not publicly traded, you can't yet invest in Arctic Wolf. If and when the company goes public, you can invest in it then. It's worth noting that you can invest in a number of cybersecurity companies that offer stock to the public, like CrowdStrike.

Keep in mind that most cybersecurity investments are likely to involve growth stocks, which can be extremely volatile. The best approach for such stocks is to use dollar-cost averaging, buying a set number of whole or fractional shares at regular intervals to even out an investment that could otherwise become a financial roller coaster ride.

ETFs

ETFs with exposure to Arctic Wolf

Exchange-traded funds (ETFs) make it simple for people to exercise passive investment instead of having to keep a constant eye on their portfolio. ETFs let investors purchase a basket of similar stocks, which not only allows for passive investment but also increases portfolio diversification; generally, the funds invest in enough stocks that disastrous performance by one company won't affect your entire financial world.

Cybersecurity-focused ETFs are becoming more popular. Here are three of the larger ones that offer reasonable expense ratios:

1. First Trust Nasdaq Cybersecurity ETF

The First Trust Nasdaq Cybersecurity ETF (CIBR 1.25%) has $6.2 billion in assets under management (AUM) and a relatively reasonable expense ratio of 0.6%, which amounts to $6 in fees for every $1,000 invested. Ten holdings account for almost half of its total assets. The fund's largest holding is Broadcom (AVGO 3.84%) at 6.7%; it also holds CrowdStrike (5.94%), Palo Alto (5.5%), and Okta (3.74%).

The ETF is one of the oldest pure-play cybersecurity funds. It was created in 2015, and share prices have more than doubled since then. The fund holds about three dozen stocks that are rebalanced on a quarterly basis.

2. ETFMG Prime Cyber Security ETF

The ETFMG Prime Cyber Security ETF (HACK 1.0%) is also one of the longer-tenured funds focusing on cybersecurity. The fund, which was created in 2014, holds net assets of $1.65 billion and also has an expense ratio of 0.6%.

Okta is the fund's largest holding at 4.74%, followed by Zscaler (ZS 1.28%) and Fortinet (FTNT 0.23%), both about 4.7%. The ETF has almost twice the number of stocks as the First Trust offering, which means that top names in the cybersecurity sector carry less weight.

3. Global X Cybersecurity ETF

The Global X Cybersecurity ETF (BUG 1.2%) is one of the newer cybersecurity funds and concentrates heavily on software companies. It has an expense ratio of 0.5% and about $760 million in net assets.

The fund has two dozen holdings, with CrowdStrike making up 7.4%. Zscaler accounts for 6.9%, and Gen Digital (GEN 0.39%) is third with 6.4%. It's outperformed both the First Trust and ETFMG funds since its 2019 inception.

Related investing topics

The bottom line on Arctic Wolf

Cybersecurity is an extremely hot sector at the moment, and Arctic Wolf is poised to take advantage of the trend with its $900 million in funding rounds since 2012. It's now worth an estimated $4.3 billion, and appears to be on track toward becoming a hot IPO.

The timing of an IPO, however, is up in the air. As long as the U.S. economy continues its strong performance, interest rates are likely to remain relatively high, and companies are less likely to go public until they begin to come down.

In addition, Arctic Wolf is a tech growth stock with all the benefits and complications of other tech growth stocks; if and when it launches an IPO, its shares could go up very quickly and come down just as quickly. Smart investors will consider cybersecurity stocks as companies that are likely to grow very quickly but remain volatile. As always, a buy-and-hold strategy that emphasizes portfolio diversification is the best course of action.

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