Cybercrime is on the rise, and trends like cloud computing, remote work, and digital transformation are exposing new vulnerabilities in corporate defenses. Thanks to ransomware-as-a-service organizations, even inexperienced hackers can get their hands on sophisticated tools. In fact, ransomware-related data leaks rose 82% in 2021, and hackers upped their ransom demands by 36%.
In short, cybercrime is an increasingly costly problem, and the damages are expected to hit $10.5 trillion per year by 2025, up from $3 trillion in 2015, according to Cybersecurity Ventures. Not surprisingly, corporate security and IT teams are focused on implementing effective defenses, and Zscaler (ZS -1.49%) and Okta (OKTA -0.89%) are well positioned to benefit from that trend.
Here's what you should know.
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1. Zscaler
Zscaler specializes in network security. Its cloud platform -- a secure access service edge (SASE) -- spans 150 global data centers, acting as a checkpoint where web traffic is inspected and business policies are enforced. In doing so, Zscaler accelerates and secures employee access to critical applications and infrastructure, enabling users to connect to corporate resources (and the open internet) from any device or location.
More importantly, as the largest security cloud, Zscaler has achieved significant scale. Its platform inspects over 210 billion web transactions per day, and it leans on artificial intelligence to identify and prevent attacks. That results in a network effect, with each client bringing more security signals to the platform. When a new threat is identified, Zscaler can instantly block it across its entire ecosystem, meaning each additional client creates value for every client on the platform.
Research company Gartner recently named Zscaler an industry leader, citing a greater ability to execute than any of its rivals. Better yet, that marks the 11th consecutive year that Zscaler has been recognized as a best-in-class solution. Not surprisingly, those accolades have come alongside impressive financial results. Over the past year, revenue climbed 60% to $859.6 million, and free cash flow surged 145% to $196.3 million.
Looking ahead, Zscaler can maintain that momentum. The company puts its addressable market at $72 billion, but management sees room to grow that figure by targeting smaller businesses, additional cloud workloads, and Internet of Things workloads. More broadly, enterprises hoping to flourish must protect their sensitive data while providing employees with a good digital experience, and Zscaler makes that possible. That's why I plan to hold this unstoppable growth stock forever.
2. Okta
Okta specializes in identity and access management (IAM), a branch of cybersecurity that seeks to securely connect the right people to the right technologies at the right time. Its platform integrates with over 7,000 applications and infrastructure providers, allowing clients to enforce contextual access policies based on a user's identity, network, device, and location. Moreover, Okta leans on artificial intelligence to identify the risk associated with each sign-in event, creating a network effect that makes its predictive engine more accurate over time.
Two of Okta's greatest assets are the breadth and independence of its platform. Okta provides solutions for both customer identity and workforce identity, and its software isn't associated with any specific infrastructure provider. That differentiates the company from Microsoft, which offers its own IAM product (Azure Active Directory). More importantly, Forrester Research recently recognized Okta as the industry leader, citing a stronger current offering and growth strategy than any rival.
Over the past year, Okta delivered an impressive financial performance. Its customer count jumped 50% to 15,000, and the average customer spent 24% more, evidencing the stickiness of its platform. As a result, revenue grew 56% to $1.3 billion, and the company generated $87 billion in free cash flow (FCF). As a point of clarification, FCF dropped 22% compared to the prior year, due in part to expenses associated with the Auth0 acquisition, but more so because management is investing aggressively in growth.
Case in point: In 2021, Okta announced two new products: Identity Governance and Privileged Access. The former helps clients meet compliance requirements and automate identity workflows, while the latter helps clients secure privileged accounts (i.e., those with access to sensitive data). Both products are set to launch in 2022, making Okta's portfolio even more robust.
To that end, management puts its addressable market at $80 billion, leaving a long runway for growth. And with the stock trading at 19.5 times sales -- below its five-year average of 25 times sales -- now looks like a good time to buy a few shares.
