Many artificial intelligence (AI) stocks have skyrocketed over the past year as the bulls worked to take advantage of the growth potential of generative AI platforms. That buying frenzy seen in the markets this year might be inflating many of those AI stocks to bubbly valuations.
For those who were late to hop aboard the AI bandwagon, there are still pockets of growth elsewhere across the tech sector for shrewd investors to tap into. The cybersecurity market is one of those pockets, and stocks like CyberArk Software (CYBR -1.01%), Zscaler (ZS 1.28%), and SentinelOne (S 1.70%) also have real potential to make you a lot richer. Let's take a look at these three stocks and why they could make you forget about AI.
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1. CyberArk
Many cybersecurity companies protect an organization's infrastructure from external threats. But CyberArk develops tools for privileged access management (PAM) for countering internal threats like disgruntled employees and corporate spies. When it detects a network breach, it locks down the affected systems and locates the threat.
CyberArk now serves over 8,000 customers worldwide, including more than 55% of the Fortune 500 and 35% of the Global 2000. Its revenue had a compound annual growth rate (CAGR) of 18% from 2017 to 2022, and analysts expect it to continue at a CAGR of 24% from 2022 to 2025. According to Markets and Markets, the global PAM market could still see a CAGR of 21.5% from 2023 to 2028.
CyberArk turned unprofitable last year as it expanded its cloud-based subscription services to pivot away from single-use licenses. However, analysts expect its annual adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to turn positive again in 2023 and more than quadruple by 2025.
CyberArk's stock price has already rallied more than 50% this year and doesn't seem like a bargain at 9 times next year's sales. Nevertheless, its early mover's advantage in the PAM market and its long-term growth potential justify that higher valuation.
2. Zscaler
Zscaler is another company that focuses on internal threats instead of external ones. It specializes in "zero trust" tools, which treat everyone (including a company's CEO) as a potential threat to fend off intruders.
But unlike other companies that install their services in on-site equipment, Zscaler only provides cloud-native services, which are stickier, easier to scale up, and don't take up any physical space.
The company's revenue had a CAGR of 53% from fiscal 2018 to fiscal 2023 (which ended this July). It currently serves over 7,500 customers worldwide, including 30% of the Global 2000. But it could still have plenty of room to grow: Mordor Intelligence expects the zero-trust market to see a CAGR of 17% from 2023 to 2028.
Zscaler's growth has cooled off over the past year as the macro headwinds made it tougher to gain new customers. However, analysts still expect its revenue to rise at a CAGR of 26% from fiscal 2023 to fiscal 2026 -- which implies its cloud-native advantage will enable it to grow faster than the broader zero-trust market.
Zscaler's stock has rallied nearly 80% this year, and it doesn't seem cheap at 13 times this year's sales. Yet this high-growth cybersecurity company could still have plenty of room to run as more organizations tighten their digital defenses.
3. SentinelOne
Lastly, SentinelOne might be attractive to speculative investors who can stomach a lot of near-term volatility. It went public only two and a half years ago, but it aims to disrupt the cybersecurity sector by replacing all human analysts with AI algorithms on its Singularity platform. It claims that the approach is faster and more accurate than human-driven platforms.
SentinelOne has grown like a weed since its initial public offering (IPO): Its revenue more than doubled in each of its past three fiscal years, and it expects 46% growth in fiscal 2024 (which ends in January 2024). Analysts expect its revenue to continue rising at a CAGR of 31% from fiscal 2024 to fiscal 2026.
Those growth rates are incredible, but SentinelOne stock remains about 30% below its IPO price and doesn't seem too expensive at 10 times this year's sales. However, its losses are widening, and bigger competitors like CrowdStrike are creeping into its backyard with similar AI-driven services.
SentinelOne still has a lot to prove, but it could surprise investors over the next few years as it scales up its business. That expansion and evolution would likely drive its stock much higher.
