The Ukrainian-Russian conflict has revealed several things about the world today, including how important cybersecurity is. Cyberattacks are a clear way for Russia to harm Western countries in response to sanctions. And Russia itself saw its government websites taken down through distributed denial of service (DDoS) attacks reportedly conducted by individuals across the world in retaliation for its actions.
Most companies know cybersecurity is important, but this conflict might serve as the wake-up call that additional IT spending on cybersecurity is needed. Experts recommend companies spend 10% to 15% of their total IT budget on cybersecurity, but most banks and other financial service companies typically spend from 6% to 13%.
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With some sectors underspending, some of the most integral pieces of our nation's infrastructure are ill-prepared. Recent examples like the SolarWinds and Colonial Pipeline attacks show the potential here for harm.
Two companies stand to benefit from increased cybersecurity spending: CrowdStrike Holdings (CRWD 3.63%) and Cloudflare (NET 3.77%). The solutions these businesses provide are best in class and are used by some of the biggest companies across the world. Consider these two stocks as a starting point when searching for investments that should benefit from an increased focus on cybersecurity.
1. CrowdStrike
CrowdStrike is a cloud-native security platform that uses information gathered from attacks across its customer base to improve its protection. Its Falcon security software monitors more than 1 trillion events daily and has multiple expansion modules that businesses can purchase to receive better protection as well as insights into what type of attacks are occurring.
These events occur on network endpoints, such as a laptop or phone. By securing all network access points, CrowdStrike ensures a business' servers are safe from enemies.
The company recently reported its 2022 fiscal-year results, and they showcased how strong the business's financials are. For the full year, CrowdStrike's revenue grew 66% to $1.45 billion while its fourth-quarter revenue was up 63%. With roughly the same growth rate occurring throughout the year, the business showed hardly any deceleration in its expansion.
CrowdStrike's annual recurring revenue rose to $1.73 billion in the fourth quarter, which equates to a 120% revenue increase this fiscal year. Even if no new customers are added next year, the recurring revenue rate would generate an increase of 20% next year.
Perhaps the most compelling fact in CrowdStrike's investment thesis is its customer base: 15 of the top 20 banks and 254 of the Fortune 500 are customers. With its overall customer base growing 65% year over year to 16,325, it's clear that CrowdStrike is the market leader in endpoint protection. And it had only 450 customers five years ago, so its annual expansion rate has been incredible.
With an estimated total addressable market of $116 billion by 2025, CrowdStrike has plenty of room to expand with both new and existing customers.
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2. Cloudflare
Tackling a different portion of the market, Cloudflare provides content delivery networks (CDN) to its customers. This allows its clients to host their websites on Cloudflare servers, which are strategically placed in more than 250 cities across the globe. The concept is simple: The closer customers are to the data centers, the faster the website is to load information. While this doesn't sound like a cybersecurity play, a significant part of Cloudflare's value proposition to customers is its cybersecurity prowess.
Companies that run their websites using Cloudflare's CDN have much of their security taken care of. A DDoS attack like the one that took down Russian government websites occurs when a website is overloaded with requests, and instead of processing them, it simply crashes. Cloudflare's DDoS mitigation solution is designed to combat this form of attack. It has been recognized as a leader by the Forrester Wave guide to the technology marketplace, and it received the highest possible score in 15 categories.
Businesses looking to avoid these types of cyberattacks and many others turn to Cloudflare when contemplating how their website will be hosted. With more than 140,000 paying customers and 48% of its revenue derived from outside the U.S., Cloudflare has a large reach. In 2021, revenue grew 52% year over year to $656 million. Its large customers (those who spend more than $100,000 annually) increased 71% to 1,416 in 2021. Those large customers generate more than half of Cloudflare's total revenue.
Cloudflare is beginning to see its operating leverage kick in, posting a 1% adjusted operating margin. While this isn't as impressive when compared to a fully developed company, it is a huge improvement from 2019's negative 25% and 2020's negative 8% levels. The company's mission to build a better internet is just beginning, as management projects the company operates in an $86 billion market.
Teamwork between CrowdStrike and Cloudflare
With the Department of Homeland Security urging businesses to be vigilant and prepared for disruptive activity, businesses need to consider improving their cybersecurity infrastructure. On March 7, CrowdStrike, Cloudflare, and Ping Identity Holding announced that they have joined forces to provide free cybersecurity services to vulnerable industries during this time of increased risk. These free solutions could convert thousands of customers to paying ones after they realize the usefulness of CrowdStrike and Cloudflare.
With the growing need for cybersecurity looking like a long-term opportunity, investors should consider holding CrowdStrike and Cloudflare stock for at least five years to capture the return potential each has, especially with the stock prices down 38% and 58%, respectively, from their all-time highs.
