Cybersecurity companies are usually resistant to macro headwinds because most of their clients won't lower their digital defenses just to save a few dollars. The market leaders might struggle to gain new customers during economic downturns, but they'll still likely expand over the long term as cyberattacks become costly and devastating.
Last month I discussed why Fortinet, Palo Alto Networks, and CrowdStrike were all great long-term plays on that secular trend. Today I'll add three more promising cybersecurity stocks to that list: Cisco (CSCO -0.35%), Zscaler (ZS -0.25%), and Cloudflare (NET 0.12%).
Image source: Getty Images.
1. Cisco
Many investors forget that Cisco, the world's largest networking hardware company, also owns a massive cybersecurity business. Its end-to-end security division, which it repeatedly expanded through a long list of acquisitions over the past decade, generated $3.7 billion in revenue in fiscal 2022 (which ended last July) and accounted for 9% of its top line.
Cisco still generates most of its revenue from its routers and switches, but it bundles its cybersecurity solutions -- including its threat detection service ThreatGRID, its cloud access security broker Cloudlock, its network security platform Observable Networks, and its unified access platform Duo Security -- with its networking hardware devices. That strategy simultaneously widens Cisco's moat against other networking and cybersecurity companies.
In fiscal 2022, Cisco's revenue and adjusted EPS rose 3% and 4%, respectively, even as the growth of its hardware business was temporarily throttled by supply chain constraints. For fiscal 2023, it expects its revenue to rise 10%-10.5% and for its adjusted EPS to grow 13%-14% as those headwinds dissipate. Over the long term, it expects its revenue and adjusted EPS to both grow 5%-7% annually from fiscal 2021 through fiscal 2025.
Cisco's stable long-term outlook, along with its low forward multiple of 13 and high forward yield of 3.1%, make it a safe bet for conservative investors. It probably won't double or triple anytime soon, but it's definitely a good place to park your cash.
2. Zscaler
Investors who are hungry for more growth should check out Zscaler, a provider of "zero trust" services that treat everyone -- including a company's CEO -- as a potential threat. Unlike many older cybersecurity companies that install on-site appliances, Zscaler only provides cloud-based services -- which are stickier, don't require any maintenance, and are easier to scale as an organization expands.
Between fiscal 2017 and fiscal 2022 (which ended last July), Zscaler's revenue grew at a compound annual growth rate (CAGR) of 54%. Analysts expect its revenue to continue rising at a CAGR of 33% from fiscal 2022 to fiscal 2025, which is an impressive growth rate for a company that already serves 30% of the Fortune 500.
Zscaler is also proactively tapping into the explosive growth of the generative AI market, which is being driven by new AI platforms like ChatGPT, with new security tools for AI apps and AI-powered enhancements for its own security platform.
All of those fresh irons in the fire, along with the broader growth of the zero-trust security market (which Future Markets Insights expects to expand at a CAGR of 15% from 2022 to 2032), make Zscaler a promising hypergrowth play for investors who can stomach a lot of near-term volatility. Zscaler's stock might not seem cheap right now at 13 times this year's sales, but its impressive growth rates arguably justify that higher valuation.
3. Cloudflare
Growth-oriented investors should also take a closer look at Cloudflare, the cloud-based content delivery network (CDN) and cybersecurity services provider that aims to become the "water filtration" system of the entire internet.
Cloudflare's CDN platform accelerates the delivery of digital media from websites to their visitors. It accomplishes that by storing cached copies of those files on "edge" servers that are located physically closer to a website's visitors. That approach ensures that websites load quickly while relieving the strain on a company's servers.
Cloudflare also protects websites with bot-blocking security tools. It believes the combination of its CDN and security services will make the internet a lot safer and significantly reduce the need for stand-alone cybersecurity tools in the future.
It already serves data from 300 cities in more than 100 countries across the world, and it processes about 46 million HTTP requests per second. Its dollar-based net retention rate, which gauges its year-over-year revenue growth per customer, has also stayed comfortably above 100% ever since its public debut in late 2019.
Cloudflare's revenue rose 50% in 2020, 52% in 2021, and 49% in 2022. It expects its revenue to only grow 31%-32% in 2023 as it faces tougher macro headwinds, but analysts still expect its top line to expand at a CAGR of 30% between 2022 and 2025.
Cloudflare's stock might seem even pricier than Zscaler at 16 times this year's sales, but it could still have plenty of room to grow as companies load their websites with more bandwidth-intensive digital media and face more bot-based attacks.
