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3 Top Cybersecurity Stocks to Buy in March

By Danny Vena - Mar 9, 2021 at 7:02AM

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These cloud-based digital sentinels will make you richer in the coming year and beyond.

If 2020 taught us anything, it's that the need for digital security has never been greater. The headlines are rife with details of the latest hack, intrusion, or attack. The methods used to gain access to enterprise systems are becoming increasingly sophisticated and seemingly no one is immune from these attacks. The move to remote work took employees out from under the corporate IT umbrella, making cybersecurity more imperative than ever before.

In response to the growing threat, businesses are taking steps to address potential vulnerabilities. The total spent to repel these intrusions is expected to climb to more than $60 billion in 2021, up 10% year over year, according to research firm Canalys. 

Faced with this simple and glaring truth, forward-looking investors have the opportunity to benefit from this tidal wave facing businesses and governments alike: Identify companies with the most innovative cybersecurity solutions, invest in these digital denizens, and hold on for the ride.

An uncut sheet of $100 bills.

Image source: Getty Images.

CrowdStrike: Striking while the iron is hot

One of the consequences of the pandemic and the resulting stay-at-home orders was the massive migration of employees who moved away from the protection of the corporate firewalls, leaving many employees facing a much greater chance of unauthorized intrusion. CrowdStrike Holdings (CRWD -5.96%) was there to answer the call.

The company's innovative approach focuses on endpoint protection, with solutions that concentrate on servers, desktops, laptops, and mobile devices and use artificial intelligence (AI) to keep them safe from known and evolving threats. CrowdStrike's platform offers a host of security services, including threat intelligence and vulnerability management, and because it lives in the cloud, it can be deployed anytime, anywhere.

The company's Falcon platform not only works to protect from known threats but uses a sophisticated version of "crowdsourcing" data from its customer base, deploying sophisticated AI algorithms that become smarter over time. The system not only reacts to existing threats but uses advanced threat hunting to predict future attacks and stop them in their tracks.

Business is booming. For the first nine months of 2020, CrowdStrike achieved record results during each quarter. Net new subscription customers grew to 8,416, up 85% year over year, and existing customers are equally lucrative. The number of clients that subscribed to four, five, or six cloud protection modules increased to 61%, 44%, and 22% of total customers in the third quarter, illustrating the ongoing success of CrowdStrike's "land and expand" strategy. 

Revenue grew at a sustained rate of 85% year over year during the first nine months of 2020, while subscription revenue grew at an even faster rate, up 89%. CrowdStrike is still losing money but is edging ever closer to profitability. Even more importantly, cash flow soared sevenfold compared to the prior-year period.

A fingerprint being digitally scanned to verify identity.

Image source: Getty Images.

Okta: Identity verification matters more than ever

One of the biggest downfalls in cybersecurity is simply the human element. Employees fall for any number of phishing scams designed to learn their username and password, giving unauthorized parties access to corporate systems and servers. That's where Okta (OKTA -9.96%) (pronounced ahk-tuh) comes in.

The company is the undisputed leader when it comes to identity and access management. Okta takes on the otherwise onerous task of user authentication for employees, contractors, and customers. More than 9,400 organizations worldwide count on the company to handle a wide range of identification and access management protocols. The company's zero-trust convention integrates with more than 6,500 business software applications and offers everything from a single, secure login to more complex multi-factor authentication.

Okta has been consistently named the industry leader in access management. It was called out by research company Gartner for the fourth consecutive year, ranked as "the only vendor that has consistently been a Leader since the inception of Gartner's evaluation of the identity space -- starting with the first Identity as a Service (IDaaS) Magic Quadrant seven years ago." Okta has also been cited by Forrester Research as one of the leaders in the space. 

The company's growing reputation has heralded strong results. For 2020, revenue grew 43% year over year, while subscription revenue grew 44%. Okta's remaining performance obligation (RPO) -- which represents the backlog of subscription revenue -- outpaced both, up 49%. This shows that future growth is shaping up nicely. At the same time, free cash flow grew 205% compared to 2019. Okta also reached an important milestone last year, eking out a small adjusted profit in each of the past three quarters. 

This could be just the beginning. Okta generated revenue of $835 million last year, barely scratching the surface of the company's total addressable market, which clocks in at roughly $55 billion, according to management.

A padlock on top of a circuit board visual.

Image source: Getty Images.

Zscaler: Based on "zero trust"

Another company that protects users as they make their way around the internet is Zscaler, (ZS -9.66%) but it goes about it in a slightly different way. While CrowdStrike focuses on protecting endpoint devices (servers, desktops, laptops, and mobile devices), Zscaler focuses more on enterprise traffic and web requests.

Unlike cybersecurity companies of days gone by, Zscaler doesn't put up a firewall around corporate data, but rather provides protection for critical information by setting up digital firewalls that guard data no matter where users are or how they access the information. It uses "zero trust" strategies that restrict and limit access to sensitive data even among corporate employees. Because Zscaler operates in the cloud, it has much greater reach, providing secure connections for businesses and their employees when accessing on-premise or cloud-based data.

Zscaler has the notable distinction of being the only Leader in the Gartner Magic Quadrant for Secure Web Gateways. The company also ranked highest for "completeness of vision" and "ability to execute" among the 12 rivals Gartner ranked. It also marked the 10th consecutive year it was identified as a leader.

The proof is in the pudding. For the first six months of fiscal 2021 (ended Jan. 31), Zscaler's revenue grew 54% year over year, accelerating from 42% growth in 2020. Calculated billings -- a sales growth metric that factors in changes in deferred revenue -- grew an even more robust 71% in the most recent quarter. Zscaler was able to produce a small adjusted profit, while also delivering strong free cash flows, a significant improvement from an adjusted loss and cash burn in the prior-year quarter.

CRWD Chart

Data by YCharts

A nod to valuation

It's important to note that commensurate with the high-risk, high-reward nature of these stocks, they also come with a high sticker price, not unlike other high-growth companies. CrowdStrike, Zscaler, and Okta are selling at 38 times, 34 times, and 27 times forward sales, respectively, when a reasonable price-to-sales ratio is generally between 1 and 2.

That said, and the recent rotation out of tech stocks notwithstanding, investors have thus far been willing to pay up for the impressive revenue growth and potential for explosive profits that lie just over the horizon for these digital guard dogs.

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Stocks Mentioned

CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
CRWD
$138.50 (-5.96%) $-8.77
Gartner, Inc. Stock Quote
Gartner, Inc.
IT
$240.00 (-5.83%) $-14.85
Okta Stock Quote
Okta
OKTA
$78.77 (-9.96%) $-8.71
Zscaler Stock Quote
Zscaler
ZS
$128.09 (-9.66%) $-13.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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