Cybersecurity is a mission-critical investment for just about every enterprise these days. Even when IT spending slowed dramatically in early 2023, for example, this niche kept right on expanding at a healthy clip.
The cybersecurity industry isn't recession-proof, of course. But it held up well in the wake of the pandemic. And with more digital work moving to the cloud, investors have good reasons to expect strong growth ahead for many leading cybersecurity businesses.
With that bright outlook in mind, here are a few attractive stocks to consider in this niche.
1. Microsoft
Cybersecurity might be a relatively small part of Microsoft's (MSFT 1.82%) portfolio, but it's an important draw for its enterprise customers. On a recent conference call with investors, management said its seeing strong demand for products like Sentinel and Security Copilot, which uses generative artificial intelligence (AI) to monitor and respond to threats. "We continue to take [market] share across all major categories we serve," CEO Satya Nadella said.
A Microsoft investment comes with attractive features that are missing from many pure-play cybersecurity stocks. You get a massive global sales base that isn't likely to sink during a downturn that's specific to any particular niche.
That's clear from the fact that Microsoft reported steadily rising revenue in 2023 despite falling demand in areas like tech devices and PC software. The company is highly profitable as well and is sitting on a huge pile of cash. These positive factors pushed the stock's valuation higher this year, but Microsoft still looks like a good buy for 2024 and beyond.
2. Palo Alto Networks
On the other side of the spectrum is Palo Alto Networks (PANW 0.91%), which gets all its revenue from cybersecurity services. That focus is paying off right now. The company is on pace to boost sales by about 17% in its fiscal 2024 (which began Aug. 1) while most Wall Street pros are predicting just a 4% uptick for Microsoft.
In late November, Palo Alto Networks trimmed its short-term outlook, which eased the enthusiasm around the stock. Patient investors should look past that volatility and focus instead on its improving profit margins and healthy cash generation. Free cash flow is likely to reach nearly 40% of sales this fiscal year, an excellent result for any software-as-a-service (SaaS) business. The stock will probably see more swings ahead into 2024, but keep a close eye on this leading cybersecurity provider.
3. Okta
Okta (OKTA -0.69%) shares underperformed the market in 2023, but that could set investors up for excellent returns ahead. In late November, the company reported solid growth results for its fiscal 2024 third quarter (which ended Oct. 31), with sales jumping 21% to $584 million. The integration of its Auth0 acquisition is back on track after a bumpy start, and customers are loving its wider service portfolio, which now spans digital identity management and cybersecurity services.
Unlike Microsoft and Palo Alto, Okta is still operating at a loss. But its operating losses contracted to just 19% of sales this past quarter compared to 43% of sales a year earlier. Cash flow trends also imply a return to profitability ahead. Okta generated a record $150 million of free cash flow last quarter, translating to 26% of revenue.
Cautious investors might prefer to keep Okta on their watch lists until it makes more concrete progress toward sustainable profitability. But better returns will be possible for shareholders who are willing to accept some elevated uncertainty as we head into 2024.
