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Investing in Cybersecurity Stocks

Updated: Dec. 6, 2021, 5:12 p.m.

Global spending on information technology (IT) declined in 2020 due to the COVID-19 pandemic, but cybersecurity spending bucked the trend. Organizations were faced with new security challenges as cloud computing and remote work became essential. As a result, the prices of many cybersecurity stocks soared, and demand for next-gen security software in this new digital era is stronger than ever.

Recent high-profile security breaches like that of the networking software company SolarWinds (NYSE:SWI), the Colonial Pipeline, and the Washington, D.C., Metropolitan Police Department illustrate the massive need for sophisticated security services and the real-world consequences if an organization is lax with its IT security practices.

According to the Identity Theft Resource Center, data breaches through the first nine months of 2021 already exceed those for full-year 2020. Some estimates point to a doubling in ransomware attacks (where data is held hostage or threatened to be leaked unless payment is made by the victim) compared to 2020. Overall, cybercrime is on the rise at a double-digit percentage pace.

Global spending on cybersecurity is expected to exceed $150 billion in 2021 and will likely continue to be a high-growth industry. Cybersecurity stocks are a red-hot niche of the tech industry, so knowing how to invest in them can yield some big returns in the decade ahead.

Top cybersecurity stocks in cloud security, identity management, and legacy security vendors

Here are some of the top cybersecurity stocks to own in 2021 and beyond:

Company Market Cap Description
CrowdStrike Holdings (NASDAQ:CRWD) $65 billion By market cap, the largest independent cybersecurity company and leader in endpoint security software.
Zscaler (NASDAQ:ZS) $42 billion Cloud computing and internet security provider.
Okta (NASDAQ:OKTA) $40 billion Cloud-based identity and access management.
SentinelOne (NYSE:S) $17 billion Recent IPO and CrowdStrike competitor.
Palo Alto Networks (NYSE:PANW) $50 billion Largest independent cybersecurity company by total annual sales.
Fortinet (NASDAQ:FTNT) $55 billion Large legacy security company with best-in-class hardware for data center security.
Splunk (NASDAQ:SPLK) $27 billion Leader in data analytics, offering new functions such as cloud observability and security orchestration.
Datadog (NASDAQ:DDOG) $50 billion Splunk competitor that has also made a foray into security monitoring capabilities.
Akamai (NASDAQ:AKAM) $18 billion One of the largest internet infrastructure companies that helps secure web content.

Data source: YCharts. Market cap as of Oct. 21, 2021.

Cloud security, identity management, and legacy security vendors

As cloud computing has quickly grown into an industry worth hundreds of billions per year, sales of security software that’s cloud-native (built in and for the cloud) have skyrocketed. These leaders in the space have some of the most promising long-term potential:

1. CrowdStrike Holdings

A cloud-native software company, CrowdStrike Holdings (NASDAQ:CRWD) provides endpoint security -- protection for devices such as laptops, PCs, and servers, and any other device connected to a network. Because it’s cloud-based, CrowdStrike is particularly well-suited for supporting remote work.

CrowdStrike’s software uses machine learning (a type of artificial intelligence) to detect security breaches and hunt down threats. It’s also easy to deploy to the millions of people working from home and the billions of machines connected to the internet. The company has steadily increased the number of modules on its platform to help its customers, and it has new integration agreements with other tech companies to make data protection more consistent across an organization’s IT infrastructure.

CrowdStrike’s sales have been booming, and the company is currently the largest pure-play security vendor by market capitalizaton. In an increasingly mobile world with more devices continually coming online, CrowdStrike is poised to continue growing at a brisk rate.

2. Zscaler

Another cloud-native security vendor, Zscaler (NASDAQ:ZS) works in tandem with endpoint security services to help keep data secure. The company has been increasing its sales at a rapid pace and is another of the largest pure-play cybersecurity stocks.

Zscaler got started with a software-as-a-service product designed for cloud computing protection, but it has since added new internet security and end-user monitoring products. End-user monitoring is increasing with so many people now working from home. And, with global spending on cloud computing expected to exceed $1 trillion annually this decade, Zscaler is well positioned to profit from this massive opportunity.

3. Okta

Okta (NASDAQ:OKTA) is a pioneer of identity and access management, which rethinks traditional security by using what’s called zero-trust architecture. This type of identity management constantly requires verification of a user before allowing access to data and applications. If legacy security is a castle with a wall and a moat, then zero-trust security acts more like a counterspy agency.

In an increasingly mobile and cloud-based world, Okta’s identity management software has been in high demand. Businesses have a complicated web of stakeholders, including employees, third-party contractors, suppliers, customers, and the like. The sheer size and complexity of web-based applications has driven Okta’s growth story and attracted some attention, too. Fellow identity management company ForgeRock (NYSE:FORG) had a successful public debut in 2021.

Okta is firmly in the lead in this branch of security, though. Its modern take on how security should work is winning over lots of new customers, and the company is scaling up its operation to add more to its already impressive customer base.

4. SentinelOne

SentinelOne (NYSE:S) is another recent pure-play cybersecurity company to be publicly listed. Its initial public offering (IPO) in June 2021 raised $1.2 billion in cash and valued the company at $10 billion, making SentinelOne's IPO the largest ever for a cybersecurity company.

This small company operates a cloud-based endpoint security platform, which puts it in competition with CrowdStrike. Its ability to automatically detect and resolve cybersecurity threats is being well-received in the market.

SentinelOne is a rapidly growing company that more than doubled its sales in 2020 during the pandemic.

5. Palo Alto Networks

Hailing from an era that predates cloud technology, Palo Alto Networks' (NYSE:PANW) specialty is rooted in firewalls -- devices that protect traffic into and out of physical locations such as offices and data centers. While its legacy services still experience plenty of demand, the real growth is in the cloud.

The company's highly profitable platform has helped it to acquire more than a dozen smaller cloud-native businesses in the past few years. As a result, Palo Alto Networks has given its security operation a serious makeover. Management says its acquisition spree is over for now as it foresees double-digit percentage revenue growth in the years ahead.

Although several companies command a higher valuation, Palo Alto Networks remains the largest pure-play cybersecurity operation by revenue. Now a leading cloud security provider, this legacy business is still competitive in the cybersecurity industry. Shares of the company trade for a relative value compared to its younger, high-flying, cloud-native rivals.

6. Fortinet

Another legacy security software provider, Fortinet (NASDAQ:FTNT) is also one of the largest cybersecurity companies in the world by revenue. Like its peer Palo Alto Networks, it has maintained double-digit percentage growth and is highly profitable. But unlike Palo Alto Networks, Fortinet has invested in its organic development of cloud security to remain competitive.

One of these developments is a recently announced software-based internet security product being built and deployed with one of Europe’s leading telecom providers, Telefónica Tech. Fortinet is also a top provider of firewalls. Its best-in-class hardware continues to generate more revenue as many organizations turn to Fortinet for help when building new data centers and servers. For investors looking for a good balance of both sales and profitability growth, Fortinet is one of the best security stocks on the market.

Did you know?

As a high-growth segment of the tech industry, cybersecurity offers investors lots of upside in the decade ahead.

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Infrastructure monitoring and content delivery networks

Cloud computing creates, uses, and stores more digital data, and an organization’s IT infrastructure can quickly become more complex by an order of magnitude. Companies that monitor these cloud-based operations are critical to cybersecurity, as are companies that manage the web content and apps themselves. Here are some top names to consider:

1. Splunk

A long-time leader in data analytics, Splunk (NASDAQ:SPLK) provides software that helps companies sift through logs of information, monitor digital activity, and orchestrate responses to data breaches. While its platform predates cloud technology, the company has been quickly migrating customers to newer cloud-based versions of its software.

Data analytics is a fast-growing segment of IT management, and Splunk is a central part of a growing number of organizations’ security and monitoring efforts. The company expects its annualized recurring revenue to roughly double in the next couple of years. With its transition to cloud tech still in progress, Splunk is a value stock -- especially when considering the company's business fundamentals such as revenue and profitability.

2. Datadog

Datadog (NASDAQ:DDOG), a cloud-native platform, is built to collect, monitor, and yield insights on cloud-based data and operations. The company uses AI to help automate the process of monitoring large and complex sets of data, relieving some of the burden of busy IT teams. It’s also been steadily expanding its platform's capabilities with new modules for things such as cloud-based security and data monitoring.

Data analytics software is a large and fast-growing segment of the tech world, which bodes well for Datadog. Elastic (NYSE:ESTC) and Dynatrace (NYSE:DT) are two other promising software makers to consider.

3. Akamai

As a content delivery network (CDN), Akamai (NASDAQ:AKAM) ensures that data securely arrives at its intended destination. With the amount of data traveling across the internet steadily on the rise, CDNs are becoming increasingly important. More people than ever are using the web for everything from entertainment to work. To bolster its network security offerings and protect its customers from ransomware attacks, Akamai recently acquired Israel-based Guardicore.

CDNs are internet infrastructure that maintain the internet “freeway” on which data travels. Akamai is a leader in this sector and is also a developer of edge computing technology, which pulls data away from centralized data centers and closer to end users.

Cloudflare (NYSE:NET) and Fastly (NYSE:FSLY), which are newer, faster-growing, and have a greater focus on edge computing, are competitors to Akamai and also worth considering.

Top cybersecurity ETFs

If you'd rather not have to choose among individual cybersecurity stocks, you can consider several exchange-traded funds (ETFs) that enable investors to participate in the growth of the cybersecurity industry as a whole.

Our top picks for cybersecurity ETFs include:

1. First Trust NASDAQ CEA Cybersecurity ETF

With $5.3 billion of assets under management when this was written, First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR) is the largest of its kind. The ETF is composed of 36 stocks in the cybersecurity industry and has an annual expense ratio of 0.6%, making it an affordable option.

2. ETFMG Prime Cyber Security ETF

Also notable in this sector is the ETFMG Prime Cyber Security ETF (NYSEMKT:HACK). Holding 63 stocks, this ETF invests in many relatively small companies in the cybersecurity industry. The fund manages $2.5 billion of assets and also has an expense ratio of 0.6%.

3. Global X Cybersecurity ETF

A newcomer in the cybersecurity ETF space, the Global X Cybersecurity ETF (NASDAQ:BUG) launched at the end of 2019. The fund manages $950 million of assets at the time of this writing, and it has an expense ratio of only 0.5%. The Global X Cybersecurity ETF is also more concentrated, with only 31 stocks in its portfolio. Since its inception, this fund has outperformed its competitors on this list.

How to invest in cybersecurity stocks

When considering how to identify the best cybersecurity stocks, remember that cloud-native companies have a natural competitive advantage with the latest software technology. However, legacy companies generate ample profit margins and have the cash to make updates. Companies that monitor cloud-based operations and those that manage web content and apps are also increasingly important to the online security of a company.

Cybersecurity ETFs are another great option and can be purchased with your favorite cybersecurity stocks. For all of your investments, stay focused on the long-term potential of these fast-growing companies. Technology that helps the digital world to stay safe is rapidly evolving and proliferating, and cybersecurity companies will reap the financial benefits accordingly.

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