Cybersecurity has never been more important than in today's digital-first environment. Companies must protect every network point, so breaches are prevented. Should protective measures fail, the results can be disastrous, as demonstrated during the Colonial Pipeline attack earlier this year.
Due to this necessity, cybersecurity stocks make fantastic investments. Businesses rarely switch away from cybersecurity companies because of the enormous financial and time burdens a change causes. Three companies investors should consider purchasing are Crowdstrike (CRWD 2.03%), Okta (OKTA -0.69%), and Zscaler (ZS 1.28%). While all are great businesses, which is the best stock to buy?
Image source: Getty Images.
What does each company do?
Each company tackles cybersecurity differently. Although some business segments may compete with each other, all three tout their ability to integrate their flagship products to form an ultra-secure solution.
Crowdstrike secures endpoints, like laptops or mobile devices, to provide business security. Crowdstrike's edge is its security cloud that maps and analyzes attacks on different endpoints across its customers' networks. If an attack occurs at a certain company, Crowdstrike's artificial intelligence determines what happened and ensures customers worldwide are protected from a similar exploit.
Okta focuses on identity management so only those who should be on the network can access it. This lets employees work remotely, as companies can ensure their network isn't being compromised. Okta also offers a customer identity solution that prevents account takeover and builds customer trust with extra security features. With 81% of breaches caused by stolen or weak passwords, Okta's multi-factor authentication process can prevent these attacks and save businesses and their customers time and money.
Today's business environment involves many devices, like a mobile device, sensors, or testing equipment, connected to the same server feeding information into applications. If a malicious event occurred on one of those devices, it could affect others. Zscaler prevents this by implementing a zero-trust network that trusts no one and only lets users access certain applications based on multiple factors. Zscaler also helps businesses transition from older network technology to cloud connectivity.
Business execution and stock valuation
All three businesses are still led by their founders, a trait many investors esteem when searching for investments. These founder-CEOs typically have their heart and soul invested in the company and will push the boundaries of innovation to watch their creation succeed. Many successful businesses like Tesla (TSLA -1.11%) and Nvidia (NVDA 6.18%) are founder-led, and Jay Chaudhry (Zscaler), Todd McKinnon (Okta), and George Kurtz (Crowdstrike) are aiming to replicate the success Elon Musk (Tesla) and Jensen Huang (NVIDIA) have enjoyed with their companies.
It's hard to find a fault in any of their quarterly earnings reports when examined from a growth mindset. In each of their most recent quarters, all posted spectacular results.
| Company | Revenue (TTM) | Revenue Growth (YoY) | Free Cash Flow (FCF) | FCF Margin |
|---|---|---|---|---|
| Crowdstrike | $1.29 | 63.8% | $123 | 32% |
| Okta | $1.15 | 61.2% | $33 | 10% |
| Zscaler | $0.76 | 61.5% | $83 | 36% |
Data Source: Macrotrends, Crowdstrike, Okta, and Zscaler. Trailing Twelve Month Revenue in Billions. Free cash flow in millions.
Some bears may point out that none posted generally accepted accounting principles (GAAP) operating profit. While this is concerning, long-term investors should be excited as the companies are capturing as much market as possible by spending on innovation and sales teams.
When valuations are examined, each company is valued differently yet highly.
OKTA PS Ratio data by YCharts
Each has seen its valuation rise after investors realized the business demand the pandemic generated for the trio. Zscaler has the highest valuation and hasn't returned to normal levels, unlike Crowdstrike and Okta. Both are reaching normal levels set pre-pandemic. None are cheap, but the market values them highly because of strong execution and future market opportunity.
Evaluating gross margin can give investors insight into how much a company makes when production costs are subtracted.
CRWD Gross Profit Margin (Quarterly) data by YCharts
Even though Zscaler's gross margin is the best, it has fallen from its previous highs. Okta is the lowest of the trio; it fell below the 70% mark during the last two quarters. When gross margins fall, it can be a sign the company is losing pricing power. The flip side is also true with Crowdstrike as its gross margin is rising, demonstrating pricing power.
What's the best buy?
Investors can nitpick Crowdstrike, Zscaler, and Okta all they want to find holes in the investment thesis. The bottom line is, all three are great potential investments and could form a strong cybersecurity stock basket. If I picked a winner, it would be Crowdstrike. It isn't at peak valuation, gross margin is increasing, and it is growing revenue the quickest while producing strong free cash flow. Zscaler and Okta are still great companies, but they fall short compared to Crowdstrike.
Businesses must get cybersecurity right. No one wants to be the leading news story for a data breach. Crowdstrike, Zscaler, and Okta operate in this space and make fantastic investments. As 2022 nears, growth-oriented investors should consider buying any of these great stocks.
