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Investing in Cybersecurity Stocks

Updated: July 27, 2021, 5:37 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 of the networking software company SolarWinds (NYSE:SWI) and the Colonial Pipeline illustrate the massive need for sophisticated security services -- and the real-world consequences if an organization is lax with its IT security practices. Global spending on cybersecurity is thus expected to exceed $120 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.

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

Top cybersecurity stocks in 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, which uses artificial intelligence (AI) to detect security breaches and hunt down threats, is easy to deploy to the millions of people working from home and the billions of machines connected to the internet.

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 rapid pace.

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 software 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 more people now working from home. And, with global spending on cloud computing within the decade expected to exceed $1 trillion annually, Zscaler is well positioned to profit from this massive opportunity.

3. Okta

Okta (NASDAQ:OKTA) is a pioneer of identity 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. Its modern take on how security should work is winning over lots of new enterprise customers -- nearly 10,000 at the time of this writing.

4. SentinelOne

SentinelOne (NYSE:S) is the most recent pure-play cybersecurity company to be publicly listed. The company’s 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, and 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 monitor and 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 firms in the past few years. Palo Alto Networks has been able to maintain double-digit percentage revenue growth and remains the largest pure-play cybersecurity operation by revenue. Now a leading cloud security provider, this legacy firm 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 firms 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.

Fortinet is also a top provider of firewalls. In fact, its best-in-class hardware continues to generate more revenue as many organizations building out new data centers and servers turn to Fortinet to keep their internal networks secure. 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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Top cybersecurity stocks in 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 therefore critical to cybersecurity, as are companies that manage the web content and apps themselves. Here are some top names to consider:

1. Splunk

The long-time leader in data analytics, Splunk (NASDAQ:SPLK) provides software that helps companies to sift through logs of information, monitor digital activity, and find and orchestrate responses to data breaches. While its platform predates cloud technology, the company has been quickly migrating customer contracts over to the cloud as it updates its software for the cloud computing era.

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. Splunk 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 purpose-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 cloud environments, relieving some of the burden of busy IT teams.

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 alongside Datadog.

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, and the pandemic causing a sharp spike in internet traffic last year, content delivery networks are becoming increasingly important. More people than ever are using the web for everything from entertainment to work.

CDNs are internet infrastructure that maintain the internet “freeway” on which data travels. Akamai is the 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 $4.1 billion in assets under management at the time of this writing, First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR) is the largest of its kind. This ETF is composed of 40 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 61 stocks, this ETF invests in many relatively small companies in the cybersecurity industry. The fund manages $2.3 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 just over $550 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 32 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, while legacy companies may have stronger financial positions. Companies that monitor cloud-based operations and those that manage web content and apps are increasingly important to the online security of a company.

Cybersecurity ETFs are another great option and can be purchased alongside 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.