The biggest near-term threat to corporations might not be a recession or even climate change. According to research firm McKinsey & Company, cyberattacks are on track to cause $10.5 trillion in damage every year from 2025 onward, which will be triple the amount they caused in 2015.
As a result, McKinsey believes companies should collectively be spending $2 trillion each year on cybersecurity software to protect themselves. But there's a problem: They are on track to spend just $189 billion in 2023. That's a $1.8 trillion spending gap, which is likely to close over time because the cost of not paying for adequate protection is skyrocketing.
CrowdStrike (CRWD 2.03%) and SentinelOne (S 1.70%) are two leading providers of cybersecurity tools, and they will benefit from that trend. Shares in each company have soared this year, but they're still trading below their all-time highs, which is an opportunity for investors to buy in ahead of what could be a spending boom across the industry.
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1. CrowdStrike: Down 10% from its all-time high
A growing number of companies rely on technologies like cloud computing to operate their sales channels, connect their global workforces, and handle day-to-day business. That means hosting their critical applications online, subjecting them to cyberattacks around the clock.
CrowdStrike's Falcon platform offers comprehensive cloud security, data protection, and proactive threat hunting. But the company is a true specialist in endpoint protection, which is arguably the most critical piece of the digital puzzle. An endpoint is any device or computer used by an employee, and CrowdStrike says that's where 90% of successful cyberattacks originate.
Employees are always interacting with the outside world through emails, phone calls, messages, and even online purchases. That makes them a prime target for malicious actors, who use those channels as a doorway to infiltrating the organization's wider network.
CrowdStrike combats such threats with the help of artificial intelligence (AI). It trains AI models on data from over 2 trillion cybersecurity events each day to weed out attempted breaches as accurately as possible.
The average employee within any company can't be expected to become a cybersecurity expert. By using AI, CrowdStrike can automate threat detection and incident response so it operates in the background without the user even knowing.
As of the recent fiscal 2024 third quarter (ended Oct. 31), CrowdStrike had $3.1 billion in annual recurring revenue (ARR). It marked an increase of 35% year over year, but it's still a fraction of what the company estimates is a $100 billion opportunity in AI-powered cybersecurity alone. Of course, based on the spending gap identified by McKinsey & Company, CrowdStrike's opportunity could be substantially larger.
CrowdStrike's stock surged 145% in 2023, but it still trades 10% below its all-time high after a brutal sell-off in 2022. The Wall Street Journal tracks 45 analysts covering the stock, and 36 of them gave it the highest possible buy rating -- not a single one recommends selling. With a consensus like that, it's very possible CrowdStrike will be trading beyond its best-ever level in the new year.
2. SentinelOne: Down 65% from its all-time high
SentinelOne is a much smaller cybersecurity company than CrowdStrike, but its AI-powered approach is equally resolute. Its stock has jumped 81% in 2023, but it's still down 65% from its all-time high, which was set during the tech frenzy of 2021. It was trading at an unsustainable valuation at that time, and the steep discount is now a great opportunity for investors to buy.
SentinelOne's flagship Singularity platform is a complete solution for a business of almost any size. It offers cloud security, identity protection, and endpoint protection. Automation is central to the company's approach because it believes machines can act faster than humans can when a threat rears its head.
Singularity Cloud Workload Security features a host of AI-powered tools, including its Behavioral AI Engine. It's an active technology working around the clock to build storylines, so when a breach occurs, it provides managers with a report complete with context and diagrams so they can rapidly trace the attack to its origins.
Singularity also offers unique features like One-Click Rollback, so once a successful breach is neutralized, the organization can restore its digital assets to a pre-attack state to reverse the damage. But SentinelOne is taking its AI approach to the next level following the release of Purple AI, an AI-powered chatbot designed to speed up workflows and hunt for threats with a single prompt from cybersecurity managers. It can also reduce alert fatigue by autonomously creating summaries of incidents, saving human workers hours of manual investigation.
SentinelOne had $664 million in annual recurring revenue at the end of its fiscal 2024 third quarter (ended Oct. 31). This represented a year-over-year increase of 43%, so while the company generates less revenue than CrowdStrike, it's growing more quickly, which suggests it's gradually taking market share.
But there's another reason SentinelOne stock could soar next year: Its price-to-sales (P/S) ratio -- which measures its trailing-12-month revenue relative to its market capitalization -- is just 13.4, as of this writing. That means SentinelOne stock would have to rise 59% just to trade in line with CrowdStrike's P/S ratio of 21.4. SentinelOne is growing its revenue faster than CrowdStrike, and that typically warrants a higher P/S ratio, not a lower one.
Therefore, SentinelOne stock is likely poised for a great year in 2024, not only on the back of growing cybersecurity spending, but also on the basis of its valuation.
