Cybersecurity is a lucrative industry for investors, as clients are unlikely to cut their spending even in the face of a recession. Plus, with cybercrime expected to grow significantly over the next decade, businesses must ensure their protection is top-notch, as a successful cyberattack can be costly.
Three companies come to mind as a way to invest in this trend, and investors should consider adding at least one (or maybe a basket of the three) to gain exposure to this trend.
1. CrowdStrike
CrowdStrike (CRWD 0.13%) is my top company in the cybersecurity space. Although its base offering is endpoint protection (the software that secures network endpoints like a laptop), it has over 20 offerings, including cloud security and identity protection. With over 62% of its clients using five or more products, CrowdStrike has successfully launched and upsold its products, but it isn't stopping there.
Currently, CrowdStrike's total addressable market is $76 billion, although that is expected to expand to $98 billion in 2025. However, with multiple product launches planned between now and 2026, CrowdStrike expects its addressable market to grow to $158 billion. That amount of upside is incredible, and with it already proving it can upsell its products to clients, CrowdStrike has a massive amount of growth ahead.
Even now, CrowdStrike is growing at a rapid pace. In the fourth quarter of fiscal year 2023 (ended Jan. 31), CrowdStrike grew its customer base by 41% to over 23,000. Among existing customers, the average client spent $125 for every $100 they spent last year, showing CrowdStrike's upselling ability. Combined, these two factors powered a 48% annual recurring revenue growth to $2.56 billion.
With the stock trading for a reasonably priced 12.5 times sales, CrowdStrike looks like a no-brainer buy.
2. Cloudflare
Cloudflare's (NET -1.05%) mission is to build a better internet, which includes securing it from threats. Its products are centered around hosting a client's website on the cloud at multiple data centers globally; that way, if one goes down due to a power outage or is overloaded with requests, it's easy to redirect the traffic elsewhere. Additionally, Cloudflare protects these websites, including zero trust access, bot management, and a firewall service.
While Cloudflare isn't a pure play in the cybersecurity industry, website security is one of the primary reasons prospective customers may migrate to Cloudflare. With over 112 billion cyberthreats blocked daily for its 168,000 customers, Cloudflare is proving its relevance.
The company isn't doing half-bad, either. In the first quarter, Cloudflare's revenue grew by 37% to $290 million, and the company issued strong guidance for the rest of the year, with revenue projected to grow at a 32% pace. After quarterly earnings weren't received well by the market (the stock dropped 20%), Cloudflare's stock looks better priced at 16 times sales.
The future is bright for Cloudflare, and the time to buy the stock may have just happened.
3. Fortinet
Fortinet (FTNT -2.17%) is much older than Cloudflare and CrowdStrike but hasn't lost a step to the younger competitors. With its network security solutions, Fortinet offers products like firewalls and intrusion detection. In many ways, Fortinet is a direct competitor to both Cloudflare and CrowdStrike, but with a massive cybersecurity market, there is room for multiple winners.
The company also has something the other two do not: profitability. In Q4, Fortinet posted a 28% operating margin while delivering a 33% revenue increase. This proves that a company doesn't need to choose either profitability or growth, as Fortinet has consistently grown its revenue while producing great margins for some time.
FTNT Revenue (Quarterly YOY Growth) data by YCharts.
This also looks like another strong year for Fortinet, with billings expected to grow by 21% while delivering a 25% operating margin.
With the stock trading at 12 times sales, it's valued about the same as the other two. However, because it has already achieved profitability and has a broad customer base (63% of the Fortune 500 utilize Fortinet), the stock's risk has subsided.
This trio is a strong pick for creating a cybersecurity basket in your portfolio. I won't be surprised if this group stomps the market over the next three to five years with the current market trends.
