Cybersecurity just might be the No. 1 issue facing businesses today. Threats of breaches, ransomware, malware, and other types of sabotage are growing and the nature of their attacks is constantly evolving. Governments at all levels have also flagged cybersecurity as a priority as they work to protect infrastructure and other crucial assets. At a cybersecurity summit last summer, President Joe Biden made clear that the cybersecurity industry would be essential to the nation's security.
From ransomware attacks like the one that temporarily shut down on the Colonial Pipeline in 2021 to several less-publicized attacks over the past year to ongoing cyberattacks from Russia used as part of their operations against Ukraine, cybersecurity concerns around the world are on the rise. Both the U.S. and Europe have reportedly warned large banks and others to be highly vigilant at this time.
Image source: Getty Images.
This is scary stuff, but numerous companies are working hard every day to secure our infrastructure, government resources, and businesses, and to shield individuals from threats like identity theft. These dynamic players are on the cutting edge of security, which puts them in high demand. It also puts their stocks in high demand as shareholders and others see the terrific opportunities this need creates in this growing industry. Let's take a closer look at three such stocks that are taking the lead in this part of the tech sector and why now might be a good time to invest in them.
1. Microsoft
When Microsoft (MSFT -1.27%) is mentioned, cybersecurity is probably not the first thing to come to mind. But Microsoft is on the front lines of the cybersecurity battle.
It is a massive cloud services provider, and more than 1 billion users rely on their Microsoft account as a single sign-on to access the company's products. Microsoft also reports that its services target more than 50 different categories of security solutions as determined by industry analysts and it is a leader in 19 of those security categories.
Few players can match Microsoft's expertise or resources. Its Security Information and Event Management (SIEM) software had over 15,000 customers as of the second quarter of 2022, a 75% increase year over year, as companies are clamoring for integrated solutions. Microsoft has seen sales of more than $15 billion in its security business in the 12 months ending in the 2022 second quarter, up 45% year over year.
The company also provides leadership in cybersecurity through cybercrime legislation and strategy advice, cloud security, and public-private partnerships with its Digital Crimes Unit. Recognizing the need for skilled workers in cybersecurity, Microsoft launched a campaign late in 2021 to partner with community colleges in the U.S. Over 250,000 jobs in the industry will need to be filled in the next 10 years, the company says, and its community college partnership will assist with faculty training, free curricula, and a scholarship fund.
Microsoft's long-term shareholders should benefit from its leadership in this industry.
2. NortonLifeLock
Switching gears from protecting enterprises to protecting individuals brings us to NortonLifeLock (GEN 0.59%). Its products include Norton 360, an all-in-one service to protect PCs and other devices, and Norton LifeLock, a popular product protecting against identity theft.
LifeLock monitors customers' accounts, provides alerts if their information is trafficked on the dark web, and manages passwords. It reimburses stolen funds in certain instances, and has a host of other features. Anyone who has ever been the victim of identity theft or knows someone who has can testify to the upheaval it can have on your life. This is one reason Norton reported over 23 million direct customers and 80 million users as of the third quarter of 2022.
Norton recently announced a merger with Avast, which provides antivirus and other security solutions for more than 435 million monthly users. The merger is clearing regulatory hurdles and is expected to close in April 2022. This combination should provide cost synergies through scale, and the companies are hoping to use their combined resources for long-term growth.
Norton has struggled to produce impressive growth in recent years. In the third quarter of 2022, revenue came in at $704 million, up just 10% from the prior-year period. But the company has successfully managed operating costs, and in that third quarter, operating expenses rose just 3% year over year. This allowed operating income to grow 16% despite only 10% growth in sales.
Norton pays a dividend that currently yields around 1.7%. The stock trades at a price-to-earnings (P/E) ratio of just under 19, which is lower than it traded for in much of 2021. The company has bucked the downward trend in tech shares, and the stock is up over 12% in 2022. Still, investors should be cautious until the company can show solid growth.
3. CrowdStrike
CrowdStrike Holdings (CRWD -3.90%) is a pure-play on cybersecurity growth. The company is a leader in endpoint protection, threat intelligence, and cloud security. Its solutions are cloud-based, and nearly all of its revenue comes from subscription services, providing annual recurring revenue (ARR). As of the third quarter of 2022, CrowdStrike had 14,687 customers, up from only 450 in fiscal 2017.
Sales have grown right along with customers, and ARR in the third quarter of 2022 surpassed $1.5 billion. As shown below, this is 67% year-over-year growth. CrowdStrike reports a gross retention rate of over 97%, and a dollar-based net retention rate of over 120%, meaning that high growth is likely to continue.
Data source: CrowdStrike. Chart by author. YOY = year over year.
CrowdStrike is one of the high-flying tech names that has seen its stock decimated during the recent market downswing. The stock now trades down nearly 13% year-to-date and 40% down from its 52-week high. One reason is a still-steep valuation now around 30 times sales. This could be problematic in the short term, given current market conditions.
Over the long term, the company shows tremendous signs of scalability, starting with its gross margin of 76% based on generally accepted accounting principles (GAAP). CrowdStrike may soon leverage its growth and reward long-term shareholders.
