Russia's invasion of Ukraine, which sparked sanctions against the country, has also sparked fears worldwide of retaliatory Russian cyberattacks. But long before that conflict broke out, many organizations had already been hardening their cybersecurity defenses to counter data breaches, ransomware attacks, and other threats.
That secular trend has turned the cybersecurity sector into a defensive one that is resistant to macroeconomic threats like inflation and higher interest rates. So today, let's take a closer look at three evergreen plays in that sector -- Fortinet (FTNT +0.18%), Palo Alto Networks (PANW +0.03%), and CrowdStrike (CRWD +1.25%) -- and why they could help make you amass a fortune.
Image source: Getty Images.
1. Fortinet
Fortinet's core platform Fortigate is a next-gen firewall that runs on on-site appliances. It links its services together with the Fortinet Security Fabric, which provides end-to-end protection for an organization's on-premise, cloud-based, and Internet of Things (IoT) services. It currently serves more than half a million customers worldwide, including the majority of the Fortune 500, and leverages its artificial intelligence (AI) and machine learning algorithms to analyze over 100 billion events daily.
Fortinet's revenue rose 20% in fiscal 2020 and 29% to $3.34 billion in fiscal 2021, and it expects 28%-29% growth in fiscal 2022. It's profitable by both generally accepted accounting principles (GAAP) and non-GAAP metrics, and its operating margins improved by both measures last year. It expects its non-GAAP earnings per share (EPS) to grow 22%-25% in fiscal 2022.
NASDAQ: FTNT
Key Data Points
Fortinet's stock price recently dipped after it suspended its operations in Russia in response to its invasion of Ukraine, but it generates less than 3% of its revenue from the country. Furthermore, an escalation of cyberattacks from Russia will likely generate tailwinds -- not headwinds -- for Fortinet's core business. Fortinet's stock isn't cheap at 66 times forward earnings and 11 times this year's sales, but its robust growth rates and firm financial discipline should easily justify those higher valuations.
2. Palo Alto Networks
Palo Alto Networks competes against Fortinet in the next-gen firewall market with its on-premise security platform Strata. But over the past few years, it expanded its ecosystem with a cloud security platform, Prisma, and an AI-powered threat detection service called Cortex.
These newer next-generation security (NGS) services, which now drive most of its growth, accounted for 29% of Palo Alto's trailing 12-month revenue in its latest quarter. The company's combined ecosystem serves more than 85,000 customers across 150 countries.
NASDAQ: PANW
Key Data Points
Palo Alto's revenue rose 18% in fiscal 2020 and 25% to $4.3 billion in fiscal 2021, and it expects 27%-29% growth in fiscal 2022 (which ends this July). It isn't profitable on a GAAP basis yet, but its non-GAAP EPS increased 26% in fiscal 2021 -- and it expects 18%-19% growth in fiscal 2022.
The bears often claim that Palo Alto relies too heavily on acquisitions to expand its ecosystem and boost its revenue. However, the company continues to develop new features organically, and it doesn't plan to make any more big acquisitions in the near future. Palo Alto's stock isn't cheap at about 80 times forward earnings and 10 times this year's sales, but it could still have plenty of room to grow over the next few decades.
3. CrowdStrike Holdings
Unlike Fortinet and Palo Alto, CrowdStrike doesn't deploy any on-site hardware appliances at all. Instead, it offers all of its end-to-end security services through a cloud-based subscription platform called Falcon. This approach is stickier and easier to scale as an organization expands. It served 16,325 subscription customers at the end of fiscal 2022.
CrowdStrike's disruptive approach enables it to grow at a much faster clip than Fortinet and Palo Alto. Its revenue surged 82% in fiscal 2021 and increased 66% to $1.45 billion in fiscal 2022 (which ended this January), and it expects 47%-49% growth in fiscal 2023.
NASDAQ: CRWD
Key Data Points
CrowdStrike's number of customers jumped 65% year over year in the fourth quarter of 2022, and it's kept its dollar-based net retention rate above 120% ever since its IPO in mid-2019. It isn't profitable by GAAP measures yet, but it expects its non-GAAP EPS to grow 54%-69% in fiscal 2023.
CrowdStrike's stock price got a bit overheated in 2021, but it's dropped nearly 40% since hitting its all-time high last November. The stock still looks a bit pricey at about 200 times forward earnings and 20 times this year's sales, but the company's early mover's advantage in cloud-based security, its explosive growth rates, and its high retention rates all justify that premium.
