Cyber attacks are becoming more frequent and costly. A recent estimate by Cybersecurity Ventures forecasts that the worldwide cost of cyber attacks will reach a staggering $10.5 trillion annually by 2025, a more than three-fold increase from 2015. It calls the 15% annual growth rate in cybercrime the greatest transfer of economic wealth in history.
The snowballing costs of cybercrime are leading more companies to beef up their network security. That's driving unstoppable growth for leading cybersecurity companies. Because of that, I'm building a mini portfolio of cybersecurity stocks centered around CrowdStrike (CRWD 0.13%), Palo Alto Networks (PANW -1.71%), and Zscaler (ZS -1.49%) by purchasing their shares hand over fist this year.
Attacking a massive market opportunity
CrowdStrike is a global leader in cloud-based protection. The company's Falcon platform uses artificial intelligence to identify threats and stop data breaches.
Customers are flocking to CrowdStrike's Falcon platform. The company has grown its customer subscription base by 44% over the past year. Clients are increasingly adopting more of CrowdStrike's modules to improve their security. At the end of last quarter, 60% of customers subscribed to five or more modules, while 21% had signed up for at least seven.
The company sees an enormous market opportunity for cloud security. The current total addressable market for its products is $76 billion. It forecasts this to hit $158 billion by 2026, driven by organic market growth and product innovation. With a current annual recurring revenue (ARR) base of $2.34 billion (up 54% over the past year), it's only scratching the surface of this market potential.
CrowdStrike believes it can grow its ARR to $5 billion by the end of its 2026 fiscal year as it continues winning new customers and expanding those relationships, driven by its product innovation. While the company's blistering growth has slowed slightly due to macroeconomic uncertainty, its long-term outlook remains as bright as ever.
Cashing in on cybersecurity
Palo Alto Networks is a world leader in cybersecurity. The company utilizes a three-platform strategy, allowing customers to simplify their security architectures with its integrated solutions.
The company has invested heavily to build out its Next-Gen Security offerings, which are paying big dividends. It's gaining share in the cybersecurity market while delivering rapid growth. Revenue was up 25% in its fiscal first quarter to $1.6 billion, with Next-Gen Security ARR rising 67% to $2.11 billion.
Palo Alto Networks is also generating strong and growing free cash flow. It expects its free cash flow margin to expand to 34.5% to 35.5% of revenue this fiscal year. That's giving it the cash to make strategic acquisitions and repurchase shares. The company is thriving amid the current economic uncertainty because customers see its integrated solutions as saving them money over the long term. That's leading them to consolidate their security with Palo Alto's integrated three-platform solution.
A massive opportunity to scale
Zscaler is a pioneer in the cloud-security space. It developed the Zero Trust Exchange, which is becoming the gold standard for cloud security. More companies are shifting away from firewalls and virtual private networks (VPNs) to zero trust exchange architecture to ensure secure remote access for their employees.
That's driving rapid growth. Zscaler's revenue rocketed 54% in its fiscal first quarter to $355.5 million. Meanwhile, free cash flow rose nearly 15% to $95.6 million, or 27% of its revenue.
However, with ARR only recently reaching the $1 billion milestone, Zscaler is still in the early stages of capturing the enormous opportunity it sees for zero trust. The company envisions a $72 billion serviceable market for its current product capabilities.
A big growth driver is expanding relationships with existing customers as they add users, upgrade to more protection, and subscribe to additional products. The company sees a more than 6x upselling opportunity within its existing customer base. It's steadily capturing this opportunity as customers experience the benefits of its integrated platform and consolidate more of their security with Zscaler.
Taking a three-pronged approach
Cybersecurity is a massive opportunity. Because of that, there will likely be many winners. That's why I'm building a mini portfolio of cybersecurity stocks focused on sector leaders CrowdStrike, Palo Alto Networks, and Zscaler. They're all in an excellent position to capitalize on the market. I've been taking advantage of this year's market sell-off by steadily buying shares of each as their stock prices drop.
