As companies continue to transition to the cloud, the need for increased levels of security has grown exponentially. That's because cybercrime has become big business, and the bad actors are on a constant search for security weaknesses.
Proof of that growing need came in November when Palo Alto Networks (PANW 1.37%) reported that cloud breaches had surpassed on-premises breaches for the first time. The pandemic has also accelerated the work-from-home (WFH) trend, which requires sophisticated endpoint protection. Elsewhere, the Biden administration has made it clear that cybersecurity is a significant government focus, and a public-private partnership is necessary to secure critical infrastructure.
For investors, this means there are opportunities to invest in the fast-growing cybersecurity industry. Here are three stocks worth considering this month.
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1. Palo Alto Networks
Palo Alto provides network security, cloud security, and Security Operations Center (or SOC) software products. The company has leading-edge technology that is constantly evolving. It has been named a leader in several product categories, including Zero Trust and Endpoint Security.
Because of the breadth of offerings and increasing security needs in the market, Palo Alto is predicting that it will have a total addressable market (TAM) of $110 billion by 2024. To grow into this market, the company has a team of over 3,200 sales specialists. This is a wise investment in the race to secure as many customers as possible in the highly competitive market.
Revenue growth is encouraging for investors in Palo Alto. In fiscal 2020, the company earned $3.4 billion. This top-line number jumped to $4.3 billion in fiscal 2021, and the company expects $5.3 billion in sales in fiscal 2022. This is a compound annual growth rate (CAGR) of 25%, and Palo Alto is predicting that its CAGR will remain above 20% through at least fiscal 2024. Palo Alto is not yet GAAP profitable, which could be concerning to investors; however, the company reported $224 million in non-GAAP operating income on $1.25 billion in revenue for first-quarter fiscal 2022.
2. Fortinet
Fortinet (FTNT -0.97%) is another corporation battling for supremacy in the cybersecurity industry. Fortinet offers cloud-based and product-based solutions and operates with a diversified global footprint. This company protected over 550,000 customers worldwide as of September 2021, and it is well-known for its FortiGate next-generation firewall.
Perhaps the most compelling reason to invest in Fortinet for the long term is its terrific profitability. While the industry is full of growth stocks without GAAP income, Fortinet breaks the mold. In fiscal 2021, the company reported a GAAP operating margin of 19.5% and a non-GAAP operating margin of over 26%.
This is especially important in the current stock market climate. Growth stocks are getting battered as soaring inflation is causing the Federal Reserve to become more hawkish. It will likely raise interest rates several times this year, which hurts the value of future cash flows and lowers the value that Wall Street assigns to growth stocks.
Fortinet also delivered impressive sales growth of 29% for fiscal 2021, with total revenue reaching $3.34 billion. Cash from operations (CFO) was also up from $1.08 billion in 2020 to $1.5 billion in 2021. The increase in CFO indicates that the business is being effectively managed. Fortinet stock currently trades about 16% down from its 52-week high.
3. Zscaler
For more growth-oriented investors, Zscaler (ZS 0.01%) should be a strong consideration. Zscaler stock has been hurt significantly by the trend away from growth stocks and is now down about 13.4% year to date and about 26% from its 52-week high. This may offer an enticing entry point; however, short-term caution is still warranted given current market conditions.
ZS data by YCharts
Zscaler's products are cloud-based and offer solutions for today's security needs. Traditional castle-and-moat models were made for companies where information was stored on-premises and employees worked exclusively from the office. Today's corporations are increasingly migrating to the cloud, and employees need the ability to work from anywhere. Zscaler's Zero Trust Exchange provides this next-generation security. In addition, the company holds or has applied for over 275 patents and is a leader in the Gartner Magic Quadrant for Secure Web Gateways.
Zscaler operates globally and receives over 50% of its revenue outside the U.S. It boasts over 5,600 customers and is relied upon by 500 of the Forbes Global 2000. The company spends heavily on sales and marketing as it looks to grow into its $72 billion TAM. And growth has been robust. In fiscal 2021, Zscaler grew sales 56% over 2020 while posting $673 million in revenue. This has continued in fiscal 2022, with Q1 sales coming in 62% year over year. The acceleration of revenue growth is encouraging and indicates that Zscaler's growth trajectory could be lasting.
Investor takeaway
One thing is for sure -- cybersecurity threats are not going away anytime soon. Companies require innovative solutions that are increasingly geared toward the cloud and the evolution of work from home. The stocks above offer three ways for long-term investors to capture a piece of this exciting industry.
