Investing in cybersecurity companies has some benefits. First, cybersecurity companies tend to be high-growth businesses growing rapidly and constantly on the cutting edge of new technology. They are also resilient during slower economic times. No company is entirely recession-proof, but it's likely that cybersecurity would be the last expense to be cut from a budget, considering its importance.
There are two cybersecurity companies that are great buys now and have long runaways of growth ahead of them. One is newer and gets more headlines; the other is less known and more established. Both would make great additions to a portfolio and could reward shareholders for years to come. Let's dig in and see why.
1. CrowdStrike
Artificial intelligence (AI) has become a buzzword in the world of investing lately, but for CrowdStrike (CRWD 2.03%), AI has been at the core of its business since the start. CrowdStrike's platform uses AI to detect and stop security breaches before they happen and automatically protects the entire network of its customers whenever a threat is detected anywhere.
This platform has proven to be popular with the largest and most important companies in the world. As of January 2023, more than half of the Fortune 500 were CrowdStrike customers, including 15 of the 20 top U.S. banks. Total subscription customers grew by 41% in fiscal 2023 and by 65% in fiscal 2022.
Customers who subscribe to CrowdStrike's platform also tend to purchase more products and spend more over time. As of the most recently reported quarter, the first quarter of 2024, 62% of customers subscribed to five or more products, and 40% subscribed to six or more. CrowdStrike also had a dollar-based net retention rate of 125%, indicating customers are spending 25% more than in the year prior.
Investors should keep an eye on revenue growth and net income over time. CrowdStrike posted a profit for the first time in Q1 of 2024. However, the rate of year-over-year revenue growth has been slowing over time and is projected to be around 35% in the current quarter. If revenue growth continues to slow, it will be important to see what impact that has on CrowdStrike's ability to remain profitable.
2. Fortinet
Fortinet (FTNT 0.23%) reported its second-quarter 2023 earnings recently, and the stock market reacted harshly, sending the stock down by 25% in the next day's trading session. This isn't entirely surprising, considering the company missed earnings estimates and lowered some guidance. However, the magnitude of the drop may have been an overreaction, as Fortinet is still a strong business with a bright future.
Taken in isolation, the quarter's results were quite good. Revenue increased by 26% year over year, billings grew by 18%, deferred revenue was up 30%, and earnings per share rose by 57%. The problem in the eyes of the market is that these were all lower than they were in the previous quarters. To make matters worse, the company is guiding for further deceleration in the third quarter. The question for investors is if this deceleration is the beginning of a longer trend or simply a bump in the road. There are some bright spots to consider.
In Q2, service revenue increased by 30% year over year for the second straight quarter. This also represents the highest year-over-year growth seen in the past two years. This is important to note because service revenue accounts for 63% of overall revenue. Full-year guidance calls for service revenue growth of 28.2%, so this should remain relatively consistent for the rest of 2023.
Fortinet also continues to generate a ton of free cash flow. In Q2, the company generated $438 million in free cash flow, which was down sequentially. Even with that sequential drop, the company has increased its free cash flow by 70% over the past year. This is good news for shareholders and highlights Fortinet's ability to weather short-term challenges in its business cycle.
