With the ongoing shift toward a hybrid work environment, it has never been more important for companies to ensure their servers and workers are protected from cybersecurity threats. A breach could be quite costly and undermine any trust the business had built with its user base. Some experts are now advising companies they will need to focus at least 10% to 15% of their IT budget on cybersecurity. This increased spending will create a huge business opportunity for companies devoted to cybersecurity.
Three cybersecurity stocks with great upside potential are Cloudflare (NET 1.44%), Crowdstrike (CRWD 2.03%), and Okta (OKTA -0.69%). These businesses approach security in different ways and don't compete with each other. Instead, their solutions interact to create a secure customer experience.
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1. Cloudflare
While security isn't Cloudflare's primary objective, it complements its primary task. Cloudflare is on a mission to build a better internet and is doing so by building data centers across the world for customers to host their websites. By storing and managing copies of customers' code and content in Cloudflare's data centers spread around the globe, its customers can deliver faster access to the content to their own customers.
On the security side, Cloudflare prevents multiple types of attacks that customers who manage their own servers often have trouble combatting. Cloudflare strives to give its customers the fastest, most reliable, and most secure way to host a website.
Cloudflare recently reported its full-year 2021 results that showed annual revenue grew 52% to $656.4 million and produced $43.1 million in free cash flow (FCF), adding to its $1.82 billion cash stockpile. While still unprofitable, Cloudflare has made great strides in improving its margins over the past three years.
| Cloudflare Fiscal Year | Operating Margin |
|---|---|
| 2019 | (25%) |
| 2020 | (8%) |
| 2021 | (1%) |
Source: Cloudflare.
In the most recent report, management gave strong 2022 guidance, projecting sales to rise 41.5% for the year and predicting a positive operating margin. With a Cloudflare-estimated $86 billion total addressable market opportunity, it has a huge growth runway for many years to come.
2. Crowdstrike
Cybersecurity isn't a new thing -- it's been around almost as long as computers have. However, with the transition to cloud computing, existing providers have had difficulty adapting security toward the new cloud era. Crowdstrike was founded as a cloud-first business and is succeeding in its mission to stop breaches.
Its Falcon platform has multiple modules that businesses can add to unlock new functionality, but at its core, it protects endpoints (such as computers or phones) from attacks. It does this by capturing more than 1 trillion events daily and using the information to continuously evolve the program using artificial intelligence. If one business is attacked in a certain manner, Crowdstrike instantly ensures every customer is protected from that type of threat.
Crowdstrike has captured many significant customers, with 63 of the Fortune 100 and 14 of the top 20 banks using its software. It also has a vast recurring revenue stream, with its fiscal 2022 third-quarter (ended Oct. 31) annual recurring revenue increasing 67% year over year to now total $1.51 billion. Crowdstrike has upsold customers to use more modules. In Q3, 68% of its customers use four or more which is up from 61% one year ago.
With Crowdstrike's expanding product suite and customer acquisition potential, there is significant sales growth ahead for this cloud security provider.
3. Okta
Okta's security solution focuses on identity management. Its tools give customers the ability to ensure those who are accessing a network or account are who they say they are. Through multifactor authentication and zero-trust security, Okta builds trust with customers and gives employers confidence in letting their employees work from anywhere.
Sticking with the trend the previous two companies set, Okta also reported fantastic fiscal 2022 Q3 (ended Oct. 31) results. Revenue was up 61% year over year to $351 million, and remaining performance obligations rose 49% to $2.35 billion. Management also excited investors with guidance that projects its 2026 fiscal year (ending Jan. 31, 2026) annual revenue will exceed $4 billion and its FCF margin will be 20%.
Including projections for the recently completed fiscal year 2022, Okta has grown its revenue at a 47% annual rate over the last four years. If it accomplishes its revenue goal for fiscal 2026, Okta will have grown its revenue at a 33% clip over the coming four years. Growing at a sustained rapid rate can provide incredible shareholder returns, making Okta a fantastic candidate to buy and hold over the next decade.
Investor takeaway
With short-term fear dominating market sentiment right now, these high-growth, unprofitable stocks have taken the full force of the market's wrath. With each stock down a minimum of 39% from its 52-week high, each can be purchased at a steep discount. Cybersecurity has long-term industry tailwinds; growth investors wanting exposure to this industry should consider purchasing all three stocks and holding them for a minimum of three to five years. With the growth these companies have ahead, a decade would be even better to see potentially life-changing returns.
