There's no denying that the cybersecurity industry has a massive runway ahead of it. According to one estimate, the global cybersecurity market is projected to reach more than $367 billion by 2029, a compound annual growth rate (CAGR) of 13% from 2021.
With such a large opportunity, there are plenty of businesses trying to gain market share. Two of these companies, CrowdStrike (CRWD +2.76%) and Fortinet (FTNT +1.11%), are at the top of my list of stocks in this space to hold for the long term. Let's dig in and see why.
1. CrowdStrike: Growing customers who are spending more
CrowdStrike most recently reported its fiscal 2023 first quarter (ending April 30) results, and they were impressive. Revenue increased 61% year over year to $488 million, and the company generated $158 million in free cash flow. CrowdStrike is consistently cash flow positive, which is important because it's not yet profitable. That said, CrowdStrike took a big step toward profitability in Q1, posting a net loss of $31.5 million, compared to a loss of $85 million in the year-ago quarter.
The more interesting trends to watch for CrowdStrike are regarding its subscription customers and how much they spend. Q1 ended with 17,945 customers, up 57% year over year. As of the end of 2021, 65% of Fortune 100 companies and 51% of Fortune 500 companies were customers.
NASDAQ: CRWD
Key Data Points
This growing customer base appears to be satisfied with the services it is receiving as evidenced by CrowdStrike's dollar-based retention rate (a measure of how much more a customer spends compared to the previous year), which has exceeded the company's 120% benchmark for the past 17 quarters.
Customers also demonstrate the value of CrowdStrike's offerings by increasingly purchasing more modules (products). As of Q1, 71% of customers subscribe to four or more modules, 59% subscribe to five or more, 35% to six or more, and 19% to seven or more. These percentages have steadily increased over time.
Despite being down 11% year to date, CrowdStrike is a market beater in 2022, staying ahead of the S&P 500's 17% loss. CrowdStrike currently trades for a price-to-sales (P/S) multiple of 26. While not cheap, that is below its average P/S of 37 and considerably lower than the high of 66 reached in early 2021. CrowdStrike has always been an expensive stock, making today's valuation a relative bargain.
2. Fortinet: Under the radar but posting impressive results
Fortinet may not be the first name that comes to mind when thinking about cybersecurity stocks, and that's a shame because the company's results are second to none.
In Fortinet's Q1 of 2022, ending on April 30, revenue was up 34% and billings increased 36%. This represented the sixth straight quarter of revenue and billings growth in excess of 20%. Additionally, revenue growth was strong across Fortinet's various geographies. Revenue in the Americas segment increased 32%, while the Europe, Middle East, and Africa (EMEA) segment grew 26% and Asia-Pacific (APAC) jumped 57%.
Fortinet is also signing larger deals with customers over time. Take a look at the increase in larger deals.
|
Number of Deals |
Q1 2021 |
Q1 2022 |
Change |
|---|---|---|---|
|
Total deals $50,000 or more |
2,489 |
3,241 |
30% |
|
Total deals $250,000 or more |
387 |
598 |
55% |
|
Total deals $500,000 or more |
167 |
243 |
46% |
|
Total deals $1 million or more |
66 |
90 |
36% |
Data source: Fortinet.
These larger-sized deals are coming from enterprise customers, who also have a need for higher-end products. In Q1, the percentage of high-end products sold was 38%, up from 32% in Q2 of 2021.
Fortinet is expecting the strong results seen over the past several quarters to continue. The company is guiding for year-over-year revenue growth of 27% in Q2 and 31% for fiscal 2022. Billings are expected to increase 30% in Q2 and 33% for the year.
NASDAQ: FTNT
Key Data Points
Like CrowdStrike, Fortinet has been a market-beating investment year to date, outpacing the S&P 500 by 2%. The stock is on the expensive side, currently trading for a price-to-sales (P/S) ratio of 14, but this is down from its recent high of 20. The current stock price may not be as much of a discount to recent valuations, but the strong results and guidance make Fortinet worthy of its premium price tag.
