All three major U.S. financial indexes dipped in September, making it the worst month of the year for the stock market. The Dow Jones Industrial Average dropped 4%, the S&P 500 slipped 5%, and the Nasdaq Composite tumbled 6%. Those declines add to the broader losses incurred during the sell-off that has taken place over the last two years.
Like many technology companies, CrowdStrike (CRWD 2.03%) and Zscaler (ZS 1.28%) saw their share prices plummet amid the drawdown, and the stocks currently trade about 45% and 59%, respectively, below their all-time highs. But CrowdStrike and Zscaler are leaders in different aspects of cybersecurity, a market that will only become more important in the future, and my conviction in both growth stocks remains high.
Here's what investors should know about these two growth stocks.
1. CrowdStrike
CrowdStrike offers more than two dozen cybersecurity software modules that span multiple industry verticals, and the company has achieved a leadership position in several of those verticals, including endpoint security, cloud security, and threat intelligence. That success arises from unique platform architecture and powerful artificial intelligence (AI).
The CrowdStrike Falcon platform can be deployed more quickly and easily than any other solution on the market because every software module is delivered through a single sensor that requires no reboot. Falcon can also crowdsource data unlike any other cybersecurity platform on the market, as evidenced by its leadership in threat intelligence, and that makes its AI uniquely effective in detecting threats.
To quote consultancy Frost & Sullivan: "CrowdStrike leads the industry with regards to the application of artificial intelligence/machine learning to endpoint security, as well as providing unparalleled prevention of malware and malware-free attacks."
CrowdStrike reported solid financial results in the second quarter. Despite challenging macroeconomic conditions, the company continued to land new customers, and existing customers continued to adopt more modules. In turn, second-quarter revenue rose 37% year over year to $732 million, and non-GAAP (adjusted) net income soared 109% to $180 million. Investors should expect similar momentum in future quarters.
CrowdStrike values its addressable market at $76 billion in 2023, but management says its product roadmap could take that figure to $158 billion by 2026. CrowdStrike is well positioned to capitalize on that opportunity due to its superior technology and ability to consolidate workloads. CEO George Kurtz says most enterprises buy "north of 60 cybersecurity point products," but the Falcon platform eliminates much of that operational burden by delivering more than two dozen modules through a single interface.
With that in mind, shares currently trade at 14.6 times sales, a bargain compared to the three-year average of 32 times sales. That's why investors may regret not buying this growth stock on the dip.
2. Zscaler
Zscaler specializes in zero-trust network access and cloud workload protection. Its platform, known as a security service edge (SSE), modernizes corporate networks by handling policy enforcement and web traffic inspection in the cloud rather than private data centers. Doing so eliminates the need for expensive on-site security appliances, and it allows businesses to more effectively protect their users and applications.
Scale is what separates Zscaler from the competition. It operates the world's largest network security cloud, and that scale affords the company an important data advantage. Its SSE platform inspects 320 billion transactions each day, capturing more than 500 trillion security signals in the process. CEO Jay Chaudhry says the network effect created by that data keeps its AI ahead of the curve, allowing Zscaler to provide superior network threat protection.
Industry analysts have corroborated that claim to some degree. The International Data Corp. recently recognized Zscaler as a leader in zero trust network access, and consultancy Gartner recognized its leadership in the SSE market. That last point is particularly salient because Gartner expects enterprise adoption of SSE platforms to approach 80% by 2025, up fourfold from 20% in 2021.
Zscaler looked strong in the fiscal fourth quarter (ended July 31). Its customer count increased 14% year over year to 7,700, and the average customer spent about 20% more. In turn, revenue climbed 43% year over year to $455 million, and non-GAAP net income soared 177% to $101 million. Investors should expect similar momentum in future quarters.
Zscaler values its addressable market at $72 billion, but management sees room to expand with small businesses, additional cloud workloads, and billions of Internet of Things devices. Zscaler is well positioned to capitalize on that opportunity, given its status as the gold standard in network security. Yet, shares currently trade at 13.6 times sales, a bargain compared to the three-year average of 33 times sales. That's why investors may regret not buying this growth stock on the dip.
