The fast-growing total addressable market for cybersecurity solutions is already approaching $2 trillion annually, so there's obviously room for multiple winners in the space. But with hundreds of options to choose from in our stock market today, it's not easy to determine which individual cybersecurity stocks are actually worth adding to your portfolio.
To that end, here are three top cybersecurity stocks I think are worth buying in October.
1. Palo Alto Networks: The benefits of industry leadership
You might be tempted to hold off buying shares of Palo Alto Networks (PANW 6.74%) with the stock up nearly 80% year to date -- but I would argue that's a mistake, as this is a winner that's poised to keep on winning.
NASDAQ: PANW
Key Data Points
After falling along with the broader market in early August, shares of Palo Alto Networks resumed roaring higher after its latest quarterly earnings (ended July 31) absolutely trounced expectations; revenue climbed 26% year over year, to $1.95 billion, translating to significantly better-than-expected earnings of $1.44 per share.
In fact, Palo Alto Networks' quarter was so strong the company opted to announce it earlier than expected -- causing a brief panic among Wall Street analysts, who were surprised by the timing until they realized the quarter was technically solid -- so management could freely discuss the results ahead of a sales conference being held that weekend.
Palo Alto Networks CEO Nikesh Arora pointed out the current "changing environment" has caused more customers to consolidate their cybersecurity efforts toward Palo Alto Networks' platform. It also didn't hurt when he noted customers have shown an overwhelmingly positive reception to Palo Alto Networks' new AI-based security automation platform, XSIAM.
Palo Alto Networks stock isn't exactly cheap, with shares trading at 10.6 times enterprise value (EV) to revenue and a forward price-to-earnings ratio (P/E) of 44X. But I think that's a fair price to pay for such a high-quality business growing at scale.
In these uncertain times, demand for cybersecurity simply isn't waning. And Palo Alto Networks is clearly benefiting from its status as a widely trusted cybersecurity stock.
2. CrowdStrike: High growth and GAAP profits!?
Like Palo Alto Networks, CrowdStrike Holdings (CRWD 3.97%) is riding a wave of fresh enthusiasm for leading cybersecurity names, with shares up more than 70% this year -- though it has yet to revisit its stratospheric post-COVID pandemic highs. If its impressive business momentum is any indication, however, I think it's only a matter of time before that happens.
NASDAQ: CRWD
Key Data Points
It seems almost silly to point out CrowdStrike's focus on innovation as a key advantage, especially considering an innovative slant should be a given for any reputable cybersecurity stock. But CrowdStrike has consistently delivered superior solutions that enable enterprises to seamlessly push the limits of what's possible as the industry advances at a blistering pace.
Only a few weeks ago, CrowdStrike announced the cybersecurity industry's first no-code application development platform, dubbed CrowdStrike Falcon Foundry, enabling IT and security teams to build custom applications with no specialized programming expertise required. The same day, it unveiled its next-gen Falcon platform, enabling customers to take advantage of new generative AI functionality in their cybersecurity efforts.
This relentless focus on innovation is yielding exceptional financial results. Annual recurring revenue last quarter soared 37% year over year to $2.93 billion, the company is sustainably cash-flow positive (generating operating and free cash flow of $245 million and $189 million during the quarter, respectively), and it even achieved generally accepted accounting principles (GAAP) profitability for the second straight quarter -- a rare feat in the world of high-growth tech stocks that tend to sacrifice profitability in order to drive growth.
CrowdStrike is even more expensive than Palo Alto Networks, with shares trading at 14X EV/revenue and a forward P/E of 47X. We're also talking about a faster-growing, solidly profitable company, however, and I see no reason it won't continue to grow into that valuation.
3. CyberArk: A budding cybersecurity stock in transition
Finally, CyberArk Software (CYBR +0.00%) is by far the smallest -- and technically the "cheapest" -- of these three stocks, trading at around 9.5X EV/revenue with a market cap of roughly $7 billion. Shares are currently up around 32% on the year.
NASDAQ: CYBR
Key Data Points
Part of the reason for CyberArk's relative discount to the aforementioned larger cybersecurity names is its slower reported growth. When CyberArk most recently announced its own significantly better-than-expected results in August, quarterly revenue had climbed 24% year over year to $175.8 million, translating to a surprising adjusted (non-GAAP) net profit of $1.3 million, or $0.03 per share (most analysts were modeling a net loss of $0.13 per share).
However, CyberArk's seemingly modest top-line growth is a consequence of the company's deliberate ongoing shift away from a perpetual license model and toward a subscription-based approach. Indeed, perpetual license revenue declined 53.6% during the quarter, while subscription revenue soared 61% to $106.2 million. Subscription revenue now represents around 69% of CyberArk's total annual recurring revenue.
While this shift has a temporary negative impact on reported growth, it will also make CyberArk's revenue streams much smoother and sustainable over the long term.
As CyberArk's transition to a subscription model nears completion, its underlying growth should become more clear. And I suspect the market could then discover a newfound appreciation for the budding business underlying its shares.
