High inflation, rising interest rates, and other macro headwinds drove many investors away from higher-growth tech stocks over the past year. However, that sell-off has also dragged down many cybersecurity stocks -- which are traditionally resistant to macroeconomic headwinds because most companies won't lower their digital defenses just to save a few bucks.
Most of the leading cybersecurity companies didn't face meaningful headwinds over the past few quarters. Instead, their stocks retreated because their valuations got overheated during the buying frenzy in growth stocks in 2020 and 2021. But now that most of that froth has been wiped away, investors should consider buying these three promising cybersecurity stocks: Tenable Holdings (TENB -2.91%), Zscaler (ZS -0.78%), and Fortinet (FTNT 0.28%).
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1. The proactive play: Tenable
Tenable's Nessus platform aims to prevent cyberattacks by scanning networks for security threats like weak passwords, misconfigured software, and other problems. It provides a free version for home users and a paid enterprise version for about 60% of the Fortune 500 and 40% of the Global 2000. It's been locking in many of those customers with additional Tenable-branded cloud-based services.
Tenable went public four years ago. Its revenue rose 42% in 2018, 33% in 2019, 24% in 2020, and 23% to $541 million in 2021. It expects its revenue to grow another 25% to 26% this year, and it believes its top line can continue to grow by more than 20% over the next few years. Tenable isn't profitable under generally accepted accounting principles (GAAP) yet, but it turned profitable on a non-GAAP (adjusted) basis in 2020. Its non-GAAP net income rose 87% to $39 million in 2021, but it anticipates a 1% to 3% decline this year as it ramps up its investments.
Tenable's focus on proactive cybersecurity solutions sets it apart from many of its industry peers, and its stock trades at just 5 times next year's sales. I believe its niche strategy and reasonable valuation make it a solid long-term play on the secular growth of the cybersecurity market.
2. The high-growth cloud play: Zscaler
Zscaler occupies another high-growth niche with its "zero trust" services, which treat everyone (including a company's CEO) as a potential threat. Instead of installing its services through on-site appliances -- which take up a lot of room, require constant maintenance, and can be difficult to scale as an organization expands -- it provides them as cloud-native services.
That forward-thinking approach locked in a lot of customers, and the company has been growing like a weed since its public debut in 2018. Between fiscal 2018 and fiscal 2022, which ended this July, its revenue grew at a whopping compound annual growth rate (CAGR) of 55% to $1.1 billion as its total number of customers more than doubled to 6,700. Zscaler expects its revenue to rise another 37% to 38% in fiscal 2023.
Zscaler also isn't profitable by GAAP measures, but it's been profitable on a non-GAAP basis since fiscal 2019. Its non-GAAP earnings per share (EPS) increased 33% in fiscal 2022, and it anticipates another 68% to 71% growth in fiscal 2023. Zscaler's stock is still reasonably valued at 10 times next year's sales, and it should continue to grow as more companies recognize the need to adopt zero-trust strategies to counter external and internal threats.
3. The balanced and profitable play: Fortinet
Fortinet initially made a name for itself with Fortigate, a next-gen firewall that upgrades traditional firewalls with network filtering services. It subsequently expanded that platform into its Fortinet Security Fabric ecosystem, which provides end-to-end protection for on-premise, cloud-based, and Internet of Things (IoT) devices.
Fortinet went public in 2009, and it now serves more than half a million customers globally, including the majority of the Fortune 500. Between 2009 and 2021, its annual revenue grew at a CAGR of 24% to $3.3 billion, and it turned firmly profitable by both GAAP and non-GAAP measures.
Fortinet expects its revenue to rise 32% to 33% this year, and for its non-GAAP EPS to increase 41% to 44% (after factoring in the impact of its 5-for-1 stock split earlier this year). Its stock is still reasonably valued at 44 times forward earnings and 8 times next year's sales, and it remains a well-balanced cybersecurity play for investors who are reluctant to hold shares of unprofitable companies as interest rates continue to rise.
