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3 Top Cybersecurity Stocks to Buy in 2019

By Joe Tenebruso – Updated Apr 14, 2019 at 9:07PM

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Defending against cybercrime is big business. Here's how to profit.

The cyberworld is an increasingly dangerous place.

Businesses of all sizes are suffering costly data breaches, which often result in substantial monetary damages and lost customer trust. Worse still, identity theft has now impacted nearly 60 million Americans, according to a 2018 survey by The Harris Poll. That's up from 15 million in 2017. 

Fortunately, the following three companies provide vital security solutions that can help defend against cyberattacks. Read on to learn about these cybersecurity leaders -- and see why their stocks are well-positioned to reward investors in the year ahead.

A person wearing a hood that veils his or her face looking at a computer screen

Here's how to profit from cybercrime -- without getting thrown in jail. Image source: Getty Images.

The identity manager

Check out the latest Okta earnings call transcript.

Okta (OKTA -2.59%) is the leading provider of enterprise identity-management services. More than 5,600 businesses rely on Okta to manage and secure the digital access rights to their network. Think passwords, login processes, and employee on- and off-boarding procedures. Okta makes all this simpler and more secure, with a well-protected single sign-on system that helps to quickly give users access to the apps they need when they need them. 

Okta's tools are in high demand. Revenue surged 58% year over year to $105.6 million in the third quarter. Better still, Okta's impressive dollar-based net retention rate of 120% shows that the gains were not only fueled by new customer additions, but also successful cross- and up-selling to existing customers. This is a strong signal that Okta is providing real value to its customers.

Looking ahead, management is targeting 30% annual revenue growth over the next five years. Helping to drive this expansion is a rapidly growing global identity and access management (IAM) market that's projected to exceed $22 billion by 2025, according to Grand View Research. 

And while Okta is not yet profitable, the company did produce positive free cash flow for the first time in the third quarter. This cash flow should grow swiftly in the years ahead, thanks to the recurring nature of Okta's revenue and scalability of its software-as-a-service business model. That makes today a good time to buy some shares of Okta -- before other investors realize its true cash-generating potential.

The internal affairs specialist

Check out the latest Varonis Systems earnings call transcript.

In addition to external attacks, organizations also face threats from within their own ranks. To mitigate this risk, businesses and government agencies are increasingly turning to Varonis Systems (VRNS -3.24%) for its insider-threat detection solutions.

Varonis analyzes users' activity and watches for significant changes from the norm. If it detects abnormal behavior -- such as unusually large volumes of data being downloaded -- it can send out alerts. Varonis can also limit the damage of data breaches by automatically locking down sensitive data. 

Like Okta, Varonis continues to add new customers at a rapid clip; its 188 customer additions in the third quarter helped to drive revenue 25.7% higher to $67 million. For the full year, the company expects revenue to rise as much as 26% to $271 million. 

Despite its impressive growth, Varonis' current revenue base accounts for just a small fraction of a market opportunity it pegs at $15 billion. This massive and still largely untapped addressable market leaves plenty of room for Varonis to grow its revenue at above-average rates for at least the next decade.

Still, like Okta, Varonis is not yet profitable on a GAAP basis. It did, however, produce $1.5 million in non-GAAP net income in the third quarter. Varonis also generated more than $13 million in free cash flow during the first nine months of 2018. This strong cash flow production should allow Varonis to self-fund its growth initiatives, thereby allowing shareholders to profit handsomely from its future expansion.

The cloud sentinel

Check out the latest Zscaler earnings call transcript.

With the world becoming more mobile every day, cloud computing is set to only grow in importance in the coming years. Few cybersecurity companies are better positioned to profit from this megatrend than Zscaler (ZS -3.68%), which provides a critical layer of cloud-based protection that helps users securely connect to their applications "from any device, anywhere." 

The cloud-based nature of Zscaler's network allows it to provide cybersecurity solutions on a global scale. Zscaler's security cloud platform encompasses 100 data centers across six continents. It protects users in 192 countries and defends against more than 100 million threats per day. 

Zscaler also benefits from powerful network effects. As more users join its platform, Zscaler's threat-detection systems become more intelligent. And once a threat is detected, it immediately places new protections in place to better secure all of its users. In fact, the company typically issues 120,000 unique security updates per day

Zscaler is growing rapidly, with revenue surging 59% to $63.3 million in its fiscal 2019 first quarter. Like Okta and Varonis, Zscaler is not yet profitable on a GAAP basis. Yet it did generate $2 million in non-GAAP net income and $5.2 million in free cash flow in its most recent quarter. In addition, the company plans to achieve sustained GAAP profitability in fiscal 2020. 

Looking forward, Zscaler expects full-year revenue between $268 million and $272 million in fiscal 2019. Yet management estimates its total addressable market to be as large as $17.7 billion. Thus, Zscaler has penetrated less than 2% of its ultimate market opportunity. That leaves long runways for growth still ahead. If Zscaler can fulfill its tremendous potential, investors who buy shares today should be well rewarded in the years ahead.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Okta and Varonis Systems. The Motley Fool owns shares of Zscaler, Inc. The Motley Fool has a disclosure policy.

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