The global cybersecurity market is already worth hundreds of billions of dollars. But in our increasingly digital world, it's still a nascent industry in its earliest stages of growth.
With hundreds of promising publicly traded companies from which to choose today, here are three leading cybersecurity stocks worth buying right now.
Out of the doghouse and into your portfolio
Shares of Datadog (DDOG 4.95%) are up more than 50% year to date on the heels of its incredibly strong quarterly update earlier this month. The data analytics platform provider saw third-quarter revenue jump 25% year over year to $547.5 million, well above estimates for $524 million, while adjusted earnings of $0.45 per share crushed expectations for $0.34 per share.
That's great, of course, if you owned Datadog before. But why should you consider buying Datadog stock after its recent pop?
If management's comments surrounding business trends are any indication, the company's gains may just be the start of a much longer-term trend. For perspective, Datadog previously plunged back in August after management issued admittedly conservative forward guidance, citing trends of customers focusing on optimizing their cloud spending, rather than deploying additional workloads.
However, in their third-quarter 2023 update, management effectively raised that conservative outlook to levels well above their previously reduced ranges, citing "robust new logo bookings and a continued focus on solving our customers' DevSecOps [Development, Security, and Operations] pain points."
Put simply: Datadog is solving problems that make its value proposition so clear that hordes of new customers are flocking to the platform. And I think Datastock has plenty of room to run from here as that momentum carries forward.
A fast-growing cybersecurity leader
Cloud security specialist Zscaler (ZS 1.28%) is growing even more quickly (pun intended!) at scale. Its fiscal fourth-quarter revenue (reported in September) was up 43% year over year to $455 million, and adjusted (non-GAAP) net income more than doubled to $0.64 per share. Both the top and bottom lines trounced Wall Street's expectations, which had called for earnings of $0.49 per share on revenue of $430 million.
How is Zscaler defying the trends that have dampened the growth of other cybersecurity names? For one, at its core, the company prioritizes innovation that goes above and beyond expectations to "delight" its customers. As such, according to Zscaler Chairman and CEO Jay Chaudhry, IT executives are increasingly prioritizing the implementation of Zscaler's "zero-trust architecture" -- that is, a system that assumes, by default, that no one is trusted, whether inside or outside of a network, requiring verification for all access requests. This modernizes their legacy network security systems.
Zscaler's retention rates reflect as much: Its dollar-based net retention rate (DBNRR) last quarter was an impressive 121%, meaning clients spent an average of 21% more on Zscaler's platform after their first year. The company is also enjoying momentum attracting large clients, ending last quarter with 449 customers (up 37% year over year) that each generate annual recurring revenue (ARR) of at least $1 million.
In today's high-interest-rate environment, where raising capital has grown increasingly challenging, it also helps that Zscaler is comfortably cash-flow positive. The company generated free cash flow of $101 million (or 22.3% of revenue) last quarter.
Zscaler exited last quarter with $2 billion in ARR -- a feat that took it only seven quarters to achieve after surpassing the $1 billion mark in 2021. Management now has their sights set on reaching $5 billion of ARR in the coming years, which is still only a small fraction of what the company estimates is already a $72 billion market opportunity.
For investors willing to buy now and hold as that growth story continues to play out, I think Zscaler will continue to stand tall as one of the market's most compelling cybersecurity stocks.
A (temporarily) troubled cybersecurity name
While I generally like to focus my attention on companies operating from positions of strength, I also think there's room to buy certain stocks during periods of temporary strife. Okta (OKTA -0.69%) is one such name. Its shares are down around 20% from their October highs as investors have been worrying about a recent cybersecurity breach.
More specifically, shares of Okta have tumbled over the past several weeks, following a report that hackers had stolen access tokens from the company's customer support case management system. Okta, for its part, wrote in its security blog that the incident involved a "threat actor" using the saved username and password of an employee's personal Google profile stored in the Chrome browser of an Okta-managed laptop to gain access to files associated with 134 Okta customers. For perspective, that's less than 1% of the company's total customer base.
Within that total, Okta says the threat actor could only use the session tokens to hijack sessions of five customers, three of whom have already shared their responses to the event. Okta has already released new security token binding features to prevent similar future breaches.
Still, as a longtime leader in zero trust architectures and user authentication, this isn't the first time (nor will it be the last) Okta has been the subject of a cybersecurity breach. It's admittedly not a great look for the company, and several analysts subsequently chimed in with words of caution ahead of its fiscal third-quarter update, scheduled for release on Nov. 29, 2023.
In the end, however, I'd be shocked if this isolated incident had any actual financial repercussions. And I think the market's knee-jerk reaction is a buying opportunity for patient, long-term investors willing to bet on Okta's continued industry leadership.
