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Investing in Cybersecurity Stocks

Updated: March 12, 2021, 6:20 p.m.

Global spending on IT declined in 2020 due to the pandemic, but cybersecurity bucked the trend. Organizations were faced with new security challenges as cloud computing and remote work turned into essentials. Many cybersecurity stocks soared as a result, and demand for next-gen security software in a new digital era is stronger than ever. Global spending on cybersecurity is expected to exceed $120 billion in 2021 and will be a high-growth industry for the foreseeable future.

Best cybersecurity stocks

From cloud security to identity management to legacy security companies, here are some of the top cybersecurity stocks to buy for 2021 and beyond.

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

CrowdStrike Holdings (NASDAQ:CRWD) – CrowdStrike is a cloud-native software company that provides endpoint security -- protection for devices like laptops, PCs, servers, and any other device connected to a network. Because it’s cloud-based, CrowdStrike is particularly well-suited for the suddenly remote world we live in. Millions of people are working from home and accessing their company’s data and applications from outside an office. Billions of machines are also connected to the internet and are vulnerable to attack. CrowdStrike’s software is easy to deploy to all these devices and uses artificial intelligence to detect breaches and hunt down threats.

Consequently, CrowdStrike’s sales have been booming, and the company is currently the largest security vendor pure-play around (as measured by market cap). In an increasingly mobile world with more devices getting hooked up to a network all the time, CrowdStrike is poised to continue growing at a rapid pace.

Zscaler (NASDAQ:ZS) – Zscaler is another cloud-native security vendor. Zscaler secures access to the internet or a cloud network itself (known as a secure web gateway, or SWG), working in tandem with an endpoint security service to help make sure data stays secure. The company has been a leader among SWG providers and has been expanding its sales at a rapid pace. It, too, has become one of the largest security software pure-play stocks around.

Migration to cloud-based operations is expected to continue for the foreseeable future. Within the decade, global spending on cloud computing is expected to exceed $1 trillion per year. This puts Zscaler at the forefront of a massive opportunity. As a leader in network security purpose-built for the cloud era, this cybersecurity stock could remain a high-growth outfit for years to come.

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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Okta (NASDAQ:OKTA) – Okta is a pioneer of identity management. Identity access management rethinks traditional security and approaches it from what’s called zero trust architecture. Rather than throw a perimeter around a network, zero trust identity management constantly requires verification of a user before allowing access to data and applications. If legacy security looked like a castle with a wall and a moat, zero trust acts more like a counterspy agency.

In an increasingly mobile and cloud-based world, Okta’s identity management software integrations have been in high demand. Its modern take on how security should work is winning over lots of new customers (nearly 10,000 as of this writing). The leader in this department, Okta is a top growth stock as the world manages its transition to the cloud.

Palo Alto Networks (NYSE:PANW) – Palo Alto Networks hails from an era that predates the cloud movement. Its specialty is rooted in firewalls, which are devices designed to monitor and protect traffic into and out of a physical location like an office or data center. There’s still plenty of need for Palo Alto Networks’ legacy services, but the real growth is in the cloud realm.

The company has used its highly profitable platform to make more than a dozen acquisitions of smaller cloud-native firms the past few years. Palo Alto Networks has been able to maintain double-digit percentage growth because of that, and it remains the largest cybersecurity pure-play operation as measured by revenue. Now a leading cloud security provider, this legacy firm is still very much a relevant player in the cybersecurity industry. Shares also trade for a relative value compared to its younger, high-flying, cloud-native peers such as CrowdStrike, Zscaler, and Okta.

Fortinet (NASDAQ:FTNT) – Another legacy security software provider, Fortinet is also one of the largest cybersecurity firms in the world as measured by revenue. Like its peer Palo Alto Networks, it has maintained its double-digit percentage growth momentum and is highly profitable. But unlike Palo Alto Networks’ steady pace of acquisitions, Fortinet has invested in organic development of cloud security to update its platform for today’s most pressing needs.

Fortinet is also a top provider of firewalls. In fact, its best-in-class hardware continues to grow as many organizations building out new data centers and servers turn to the company to keep their internal networks locked down. For investors looking for a good balance of both sales and profitability growth, Fortinet is one of the best security stock picks out there.

Infrastructure monitoring and content delivery networks

The rise of the cloud means more digital data is being created, used, and stored, and an organization’s IT infrastructure can quickly become complex by an order of magnitude greater than before. Monitoring these cloud-based operations is therefore a key component of good security practice, as is management of web content and apps themselves. Here are some top names in this sector.

Splunk (NASDAQ:SPLK) – Splunk is the long-time leader in data analytics. Its software helps a company sift through logs of information, monitor digital activity, and find and orchestrate a response to data breaches when they occur. While its platform predates the cloud, the company has been quickly migrating customer contracts over to the cloud as it is in the midst of updating its software for the cloud era. On the surface, these updates, in progress and not yet complete, make Splunk appear to be a stagnating business.

However, that’s far from the case. 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. In fact, Splunk expects its annualized recurring revenue (ARR, which combines the annualized value of old and new customer contracts) to roughly double in the next couple years.

Datadog (NASDAQ:DDOG), Elastic (NYSE:ESTC), and Dynatrace (NYSE:DT) – Splunk may still be updating its software for the cloud era, but Datadog, Elastic, and Dynatrace are already fully cloud-based. All three outfits were purpose-built to collect, monitor, and yield insights on cloud-based data and operations. All three use AI to help automate the process of monitoring large and complex cloud environments and take some of the burden off busy IT teams.

Splunk is the value stock here, meaning that its stock price is the best value when considering the company's business fundamentals such as revenue and profitability. But since data analytics software is a large and fast-growing segment of the tech world, Datadog, Elastic, and Dynatrace are three smaller but promising names in this area.

Akamai (NASDAQ:AKAM), Cloudflare (NYSE:NET), and Fastly (NYSE:FSLY) – Data that travels across the internet is steadily on the rise, and the pandemic caused a sharp spike in internet traffic last year. More people than ever are using the web for everything from entertainment to work. Ensuring data makes it to its intended destination is an important part of security, which is where content delivery networks (CDNs) come in.

CDNs are modern internet infrastructure in charge of maintaining the internet “freeway” on which data travels. Akamai is the leader here and is also a developer of edge networking, in which data gets pulled out of a centralized data center and stored at a smaller and more local data center closer to the end user. Cloudflare and Fastly are newer and faster-growing upstarts in this realm, though, and are leaders in this new edge networking movement. As more applications are created on, or move to, the internet, Cloudflare and Fastly will remain top plays in security as they bundle content delivery and app security.

Top cybersecurity ETFs

If picking the best security stocks isn’t your thing, there are several ETFs that allow an investor to participate in growth of the whole cybersecurity industry. First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR) is the largest, with $3.5 billion in assets under management as of this writing. The ETF is composed of more than 40 stocks in the cybersecurity industry and has an annual internal expense ratio of 0.6% (costing $6 per year for every $1,000 invested).

Also notable is the ETFMG Prime Cyber Security ETF (NYSEMKT:HACK). Its assets under management total $2.2 billion, and it also has an expense ratio of 0.6%. However, this ETF is a basket of 60 stocks and has a slant toward relatively small companies in the security industry. However, its performance is similar to that of First Trust’s ETF over the past few years.

A newcomer is the Global X Cybersecurity ETF (NASDAQ:BUG), which launched at the end of 2019. It therefore has far fewer assets under management than its peers, with just $275 million as of this writing, but it has an expense ratio of just 0.5%. The Global X ETF is also more concentrated, with only 27 stocks in its portfolio. This higher concentration into fewer names has served it well so far since it has outperformed the comparable funds from First Trust and ETFMG since its inception.

Cybersecurity is a growth industry

As a high-growth segment of the tech industry, investing in cybersecurity offers investors lots of upside in the decade ahead. However, security needs evolve quickly, and data breaches and other exposed deficiencies can make share prices volatile. When investing in cybersecurity software stocks, remember to stay diversified and focused on the long-term potential these fast-moving companies possess as they help the digital world stay safe.