The rapid pace of digital transformation has dramatically increased the attack surface for cyber threats. This has made cybersecurity a necessary service for protecting data and applications for enterprises and governments -- which means that the earnings of cybersecurity companies are relatively less vulnerable to macroeconomic pressures.
In TechTarget's global 2023 IT Priorities Survey, 63% of the North American respondents highlighted cybersecurity as the top spending priority. With cybersecurity being one of the best investment themes now, let's look at two compelling investments: Microsoft (MSFT 1.92%) and CrowdStrike (CRWD 4.56%).
Microsoft
The first compelling cybersecurity stock to consider is technology giant Microsoft. Although its cybersecurity portfolio is a relatively small portion of its huge business, it is nevertheless an impressive one. Microsoft's security portfolio raked in revenue of over $20 billion in 2022, up 33% on a year-over-year basis. The company has also committed $20 billion worth of investments in its security solutions from 2021 to 2026.
NASDAQ: MSFT
Key Data Points
Microsoft's cybersecurity solutions are integrated across more than 50 different categories -- both for cloud and on-premise infrastructure. Further, many of the company's solutions are considered best-of-breed in their respective categories. Gartner has ranked Microsoft as a leader in multiple cybersecurity categories, such as endpoint protection (securing end-user devices such as smartphones, tablets, and laptops), security information and event management, and access management.
Understandably, many customers opt to replace software from multiple security vendors with Microsoft's integrated cybersecurity solution. This vendor consolidation helps clients save on costs while reducing risk and complexity.
Thanks to its broad and diversified product portfolio spread across such areas as personal computing, gaming, and cloud computing, Microsoft has an exceptional understanding of the threat landscape. Coupled with this threat intelligence, the company leverages artificial intelligence and machine learning to train its security systems (65 trillion signals per day in 2022). Microsoft's security ecosystem comprises 15,000 partners, which further help the company effectively distribute its offerings.
Since Microsoft is not a pure-play cybersecurity player, investors also get exposure to other exciting opportunities such as artificial intelligence, cloud computing, and gaming. Microsoft's Windows operating system revenue declined and growth of Azure (cloud computing) revenue slowed in the second quarter of fiscal 2023 (ended Dec. 31, 2022) -- implying that the company is not completely impervious to macro headwinds.
However, the company is still highly profitable and generates tons of cash. With a solid brand name and diversified business, Microsoft can emerge as a preferred investment in case of recession, since investors may see it as a safe haven for their funds. However, if a recession is prevented, Microsoft will again benefit from increased corporate spending in areas such as cloud computing, cybersecurity, and office productivity.
Considering these factors, patient investors can look forward to reaping good returns in the coming months.
CrowdStrike
The second compelling cybersecurity stock to consider is CrowdStrike, a leading cloud-based provider of endpoint security -- that is, protection of laptops, mobile phones, etc.
The company's Falcon platform (with 23 cloud-based modules) leverages artificial intelligence and machine learning to recognize and respond to cyber threats. Artificial intelligence algorithms become more and more intelligent with every new threat in identifying and preventing cyber threats -- which further attracts more customers.
NASDAQ: CRWD
Key Data Points
CrowdStrike dominates global endpoint security with a 17.7% market share. Since the top 10 legacy vendors account for a 46.7% share of the global endpoint security market, CrowdStrike has significant scope to further expand in this market.
The company reported revenue of over $2 billion and a free-cash-flow margin exceeding 30% in fiscal 2023. What's more, it has increased its subscriber base at a blistering 79% compound annual rate since 2018 to a current total of about 23,000. Further, CrowdStrike enjoys a solid customer retention rate of over 98% and a dollar-based net retention rate of over 120% -- a testament to its success in creating a loyal customer base.
CrowdStrike has managed to succeed even in the current precarious environment thanks to its superior platform and effective marketing. Annual recurring revenue (ARR) -- a key metric for software companies -- increased 48% to $2.6 billion in fiscal 2023. While the growth in net new ARR (a metric indicating the pace of additional, new business) has been dismal in the past two quarters, the company may see better performance in the coming quarters.
One encouraging sign: the company reported a nearly 48% year-over-year jump in remaining performance obligations (RPO, a metric indicative of future revenue growth) to $3.4 billion in fiscal 2023. Further, 63% of the RPO is expected to be recognized in fiscal 2024.
CrowdStrike is currently trading at 14 times sales, which sounds high but is near its cheapest valuation since the company went public. With a robust business model, 50%-plus top-line growth, and attractive margins, CrowdStrike seems like a good pick now.
