At approximately 10 p.m. ET last night, Russian military forces invaded Ukraine. Even before the tanks began rolling, however, Russia unleashed a devastating wave of cyberattacks on Ukraine that first slowed web traffic to a halt and crashed websites, then began deploying "wiper" malware to erase computer hard drives on affected computers.
This new form of hybrid warfare is waking up investors to the dangers of cyberattacks today, and to the need for cyber defense. And stocks of cybersecurity companies are responding. Here's where three of them stood as of 1:05 p.m. ET:
- CyberArk Software (CYBR -1.07%) was up 6.9%.
- Palo Alto Networks (PANW -0.87%) had popped 9.3%.
- Cloudflare (NET -0.02%) was doing best of all -- up 9.8%.
Investors seem to be painting cybersecurity stocks with a broad brush today -- though the paint on that brush is bright green, and so shareholders of these three companies probably aren't complaining. As for investors wondering which of the three is the best cybersecurity stock to bet on, I'd rank them in this order: Palo Alto first, CyberArk second, and Cloudflare last.
Why this order, in particular?
Well for one thing, because Palo Alto has the most recent financial results to rely upon. Palo Alto reported its fiscal second-quarter 2022 earnings Tuesday, showing 30% revenue growth year over year to $1.3 billion. So even without the catalyst of Russia-Ukraine worries to boost it, we already know that Palo Alto has been doing quite well.
Earnings for fiscal Q2 were unfortunately negative -- a $0.95 per share net loss. But that was 36% less money than Palo Alto lost in the year-ago quarter, and to be honest, this company's unprofitability according to generally accepted accounting principles (GAAP) doesn't worry me at all, given how robust its free cash flow numbers (its actual cash profits) are. At last report, Palo Alto was generating cash profit at the rate of $1.4 billion per year, valuing the stock at only about 34 times free cash flow -- which sounds expensive, but really isn't if the company is growing its business at 30% per year.
Now as for CyberArk and Cloudflare, I don't dislike these two companies particularly, and in a world where military hacking wars are now a danger, both of those stocks may do quite well -- it's just that I prefer Palo Alto over them. In the case of CyberArk, No. 2 on my list, it resembles Palo Alto in that it's technically GAAP-unprofitable but free-cash-flow (FCF) positive. However, CyberArk makes a lot less money than Palo Alto does -- just $66 million in FCF generated over the past year -- and the stock's resulting valuation of 90 times free cash flow makes it look less like a bargain than Palo Alto.
And last but not least, Cloudflare. With a 39% predicted long-term annual earnings growth rate, according to Wall Street analysts, Cloudflare actually looks like it could be the company with the best growth prospects of any of these three cyber stocks. Unfortunately, currently, Cloudflare is also the stock with the worst looking present-day financials -- it's both GAAP unprofitable and free cash flow negative over the past 12 months.
Call me conservative if you like, but I simply prefer Palo Alto Networks' established record of success over Cloudflare's potential to succeed.