Cyber defense is critical to infrastructure, businesses, and governments. Heck, even school districts and nonprofits are targets. It is also a front in armed conflicts worldwide, as evidenced by the cyberattacks unleashed during Russia's invasion of Ukraine. Because of this, organizations must invest in protection, even if the country runs into a recession.
Two more secular trends contribute to increasing demand:
- Remote work is a mainstay after the pandemic accelerated its adoption. Many organizations have permanent hybrid or full-remote models. This drastically increases the need for endpoint protection.
- The evolution of the cloud propels the demand for the protection of these critical assets.
Google parent company Alphabet (GOOG -1.96%) (GOOGL -1.97%), Palo Alto Networks (PANW -1.71%), and CrowdStrike (CRWD 0.13%) are on the front lines and have fantastic results and attractive stocks. Let's find out a bit more about these three compelling cybersecurity stocks and why they can soar in 2023.
1. Alphabet invests billions in cybersecurity
Google Cloud is the world's third-largest provider of cloud platform and infrastructure services, and its customers need comprehensive security solutions. The company offers its Chronicle Security Operations suite and recently closed on a $5.4 billion acquisition of Mandiant, specializing in incident response and threat intelligence. Alphabet proves it seeks to be a major player in cybersecurity as this acquisition is the second-largest in its history.
Alphabet doesn't disaggregate its cybersecurity revenue from other Google Cloud services, but the growth in Google Cloud is impressive. The chart below shows sales have grown 2.75 times from fiscal 2019 through Q3 2022.
Data source: Alphabet. Chart by author.
Meanwhile, Alphabet's advertising business continues to be robust, despite fears of a recession. For many advertisers, being on the first page of a Google Search is necessary.
The stock is down 38% this year, and the price-to-earnings ratio is lower than it was even during the height of the pandemic crash, as shown below.
GOOG PE Ratio data by YCharts
The stock tumbled as though it is a crumbling business, but Alphabet is far from that, making it look like a no-brainer buy for long-term investors.
2. Palo Alto has transformed into an industry leader
A few short years ago, Palo Alto Networks was predominantly a firewall provider with little else on offer. Management recognized a changing industry and became a leading network and cloud security provider. According to industry research agencies, the company now boasts recognition in 17 categories.
Its Next-Gen Security offerings are gaining market share fast, with 66% annual recurring revenue (ARR) growth over the last year, rising from $1.27 billion to $2.11 billion. Overall, Palo Alto projects $6.9 billion in sales in fiscal 2023 (which ends July 31, 2023) on 25% growth. The company also just reported two consecutive quarters of GAAP profitability after years of development.
Strength in large-customer wins (1,262 customers spend $1 million or more annually) and a ballooning backlog (up 38% year over year to $8.3 billion) suggest more success to come.
Like Alphabet, the stock has suffered this year due to the broad market sell-off. Down 25%, it trades below its three-year average price-to-free-cash-flow and price-to-sales (P/S) ratios. We don't know when the market will turn bullish again, but when it does, Palo Alto has the makings of a long-term winner.
3. CrowdStrike has unparalleled growth
Judging by the stock price, one might think CrowdStrike was posting dreadful results. But it's just the opposite. CrowdStrike continues to win customers and produce massive gains in annual recurring revenue (ARR). Since fiscal 2018, customers grew from 1,242 to 21,146, while ARR exploded from $141 million to over $2.3 billion. In this case, a picture really is worth a thousand words.
Data source: CrowdStrike. Chart by author.
CrowdStrike attracts customers with its cloud-native Falcon platform, which uses artificial intelligence to prevent breaches. The platform is modular, so customers get customizable security solutions for endpoints, cloud security, threat intelligence, and more.
Recent years have seen a massive improvement in free cash flow, which reached $467 million on a 29% margin through Q3 of fiscal 2023 (ended Oct. 31, 2022). This level of free cash flow is a terrific sign that the company can be profitable at scale.
The stock trades at the lowest price-to-free-cash-flow and P/S ratios in its history.
CRWD PS Ratio data by YCharts
The broad market sell-off may not be done quite yet, but a turnaround could come in 2023. Growth stock investors should consider scaling into CrowdStrike stock for its fantastic long-term potential.
