Cybersecurity has been a long secular growth trend, but rapid shifts toward cloud computing in the last couple of years have shone a spotlight on how far behind many organizations are in protecting their operations.

Amid the current scramble to fight cybercrime, one company has emerged as the clear-cut but oft-overlooked winner: Microsoft (MSFT -1.84%). Its security business surpassed $20 billion in revenue in calendar year 2022, up from $15 billion in 2021 and $10 billion in 2020. Yet, at the same time, its much larger consumer PC and software businesses are struggling as consumers pare back spending.

So if you're seeking a pure play in the rapidly growing cybersecurity space, give Palo Alto Networks (PANW 1.37%) and Fortinet (FTNT -0.97%) a look right now.  

Palo Alto Networks: Investing in next-gen security

Despite strong industry-wide growth, cybersecurity is a tricky business. It requires constant innovation to remain competitive and relevant, since the bad guys are always adapting and advancing their attacks. To bolster its platform, Microsoft has spent billions of dollars over the years on research and development and acquiring numerous small security companies.  

But it isn't the only company that has taken this spend-heavy approach to expansion. Leading cybersecurity pure play Palo Alto Networks has fairly deep pockets, too. It acquired nearly a dozen next-gen security start-ups from 2018 to 2021, and recently ended its brief acquisition hiatus to purchase Cider Security for $195 million in cash.

As of this writing, Palo Alto has a market capitalization of $48 billion and cash and short-term investments of $3.8 billion. And it generated free cash flow (FCF) of more than $2.4 billion over the last year.  

As a result of its spending on research and acquisitions, Palo Alto thinks it can average double-digit revenue growth over the next few years. FCF generation should also remain high, giving the company the ability to make more acquisitions as needed and repurchase stock.

Next-gen services (NGS) are quickly approaching half of total revenue, making this one of the more-innovative large cybersecurity companies out there.

Microsoft's recent earnings showed an overall deceleration in cloud-spending growth, which isn't great news. With the world economy headed for a cooling in 2023, many organizations are taking longer to migrate their operations over to the cloud as they try to control expenses. A cloud slowdown will likely impact Palo Alto's immediate financial results as well. 

Nevertheless, even in trying times, the cloud industry is still expanding at north of 20% year over year. There should be plenty of opportunity for Palo Alto Networks to push its leading cybersecurity platform in the years to come. Its shares trade for 20 times trailing-12-month FCF, a better value than the slower-moving Microsoft empire at 31 times FCF.  

Fortinet: Distributing security software its own way

A key advantage Microsoft has over its rivals in cybersecurity software (and all software products for that matter) is its unrivaled distribution. Windows is still the operating system on billions of PCs and laptops the world over, with Office 365 almost a default for work and personal productivity.

With such a massive user base, it's easy for Microsoft to cheaply cross-promote other services (like its sprawling cybersecurity portfolio) to existing users. 

Fortinet does not have billions of devices running an operating system from which to distribute its services, but it does have lots of installed security hardware: its next-gen firewalls called FortiGate that monitor data traffic. Its wares can be found all over, including in internet and mobile network infrastructure, data centers running public cloud services, and businesses' private networks.

Once its hardware is installed, Fortinet enjoys steady software and services revenue from that device. And in recent years, the company has been developing other cloud-based security software it can market to its existing enterprise customer base.

It's been a differentiated and highly successful business model. The company has been enjoying double-digit-percentage revenue growth for years, and is highly profitable on the basis of generally accepted accounting principles (GAAP) and FCF. Fortinet has a market cap of $41 billion and cash and short-term investments totaling over $1.7 billion. It has generated $1.2 billion in FCF over the last 12 months.  

At this point, the stock does trade for a premium. Shares are valued at 58 times trailing-12-month earnings (or 31 times on a one-year forward expected-earnings basis) and 37 times trailing-12-month FCF. The expectation is that Fortinet will begin raking in the profits after several years of rapid adoption of its hardware.

Microsoft is certainly the "cheaper" stock at 27 times earnings per share and 31 times FCF.  Nevertheless, Fortinet is still growing, profitability is on the rise, and demand for cloud and other advanced-networking security is not going away anytime soon. This cybersecurity pure-play business still looks like a buy to me for 2023 and beyond.