Which Cybersecurity Stock to Choose?
$10,000 on one of these stocks could turn into $100,000.
I believe the CrowdStrike update fiasco we witnessed last Friday that impacted the entire globe, from giants like to Microsoft to critical infrastructure like hospitals, banks and airlines, made many people more aware than ever that cybersecurity is not just a side business segment.
Cybersecurity is truly at the heart of everything already today! And when we see that even the top stock by market cap, Palo Alto Networks ($108 bn) is still below a low to no growth company like AT&T ($133 bn) - this makes you wonder how markets (and investors) allocate their capital.
I believe that the cybersecurity segment is an under appreciated sector with tremendous growth catalysts. It will rank among the outperforming segments not just this decade - but this century. With the increase use of internet on all continents, the rise of AI and the digitalization of all modern economies - the cybersecurity stocks will continue growing rapidly.
In my opinion the sector will multiply its size by at least 10x in our lifetime, and some of the stocks in the next 5-10 years.
Here is a quick dive on all top 5 cybersecurity stocks (all happen to be incorporated in the USA).
Palo Alto Networks ($7.8 bn LTM revenue)
Revenue growth (average last 5 years): +24.9% p.a.
Operating margin (last available): +11.3% LTM
Valuation (forward price to earnings): 57x
Estimated growth (next 3 years, 25-27): +16.8% p.a.
Price target average (Wall Street): $345 (3% upside)
CrowdStrike ($3.3 bn revenue)
Revenue growth : +66.2%
Operating margin: +0.7%
Valuation: 63x
Estimated growth: +27.2%
Price targets: $393 (caution advised: will likely be revised down after the recent fiasco)
Fortinet ($5.4 bn revenue)
Revenue growth (average last 5 years): +24.2%
Operating margin: 23.8%
Valuation (forward price to earnings): 33x
Estimated growth (next 3 years): +17.7%
Price targets Wall Street: $71 (20% upside)
Zscaler ($2 bn revenue)
Revenue growth (average last 5 years): +53.6%
Operating margin: -6.8%
Valuation (forward price to earnings): 61x
Estimated growth (next 3 years): +25.3%
Price targets Wall Street: $230 (22% upside)
Cloudflare ($1.4 bn revenue)
Revenue growth (average last 5 years): +46.6%
Operating margin: -13.9%
Valuation (forward price to earnings): 125x
Estimated growth (next 3 years): +29.6%
Price targets Wall Street: $89 (13% upside)
I personally like Fortinet the most given its moderate valuation while the growth potential remains tremendous. I believe it is somewhat mispriced. My other pick is one that is perhaps not supported by metrics, but in the tech sector there is something more important than the traditional metrics to analyse a stock: the product (and sales pipeline). That puts Cloudflare very high on top of my cybersecurity picks because I believe that it has a superior product. The latter is rather subjective but “gut feelings” are something real in investing, as long as it is supported by research and company knowledge.
The key takeaway here is the spectacular growth rates of all these companies. It is difficult to say one is better than the other when all are growing rapidly.
You might as well consider the First Trust NASDAQ Cybersecurity ETF (ticker: CIBR), which is the ETF with exposure to the cybersecurity segment.
Thank you for reading and don’t hesitate to present your favorite in the comments section below! 💚🙏
Etcaetera