The 3 Best Cybersecurity Stocks to Watch as Cyberwar Fears Rise
It feels like we’ve reached a major transitionary period when it comes to warfare. Of course, planes, guns and soldiers still play a major role. However, in today’s world, a digital attack can cause just as much damage as a traditional one. Digital attacks can cause electrical blackouts, breaches of information and failure of critical infrastructure. They can also disrupt phone and computer networks, making data retrieval and communication impossible. These are just a handful of reasons why investors are searching for the best cybersecurity stocks to invest in.
The threat of cyberwarfare has been evident for years. Now, in light of the Russia and Ukraine conflict, it’s finally entering the spotlight. This situation is still unfolding. Due to this, it’s unclear how these tensions could play out between the U.S. and Russia. However, the biggest risk seems to be a back-and-forth escalation. People are also especially nervous due to the lack of historical norms. Since there has never really been a major cyber war, there is no way to know what might happen. This uncertainty generally leads investors to sell their holdings and run for shelter.
However, sometimes the darkest days offer the brightest opportunities. In this case, the opportunity could be in cybersecurity companies. If things escalate into a full-blown cyberwar then cybersecurity companies will profit greatly. On that note, let’s take a look at some of the best cybersecurity stocks to own.
Best Cybersecurity Stocks to Buy
No. 3 CrowdStrike (Nasdaq: CRWD)
CrowdStrike was founded in 2011 to reinvent cybersecurity for the cloud era. Its main products are cloud security, threat intelligence, and cyberattack response services. The first thing to note about CrowdStrike is how quickly its platform is being adopted. As of Q3 FY22, CrowdStrike works with 14,687 customers. This is up from 75% from 9,986 customers in FY 2021. Its customer base has grown exponentially since 2017. This is important because CrowdStrike operates using a subscription model. Each new customer represents a recurring revenue stream.
This customer base translates to $1.6 billion in annual recurring revenue for CrowdStrike. Almost all (94%) of this revenue comes from subscriptions. Additionally, most of these clients are very high-profile companies. They are all big companies with big budgets. As the threat of cyber warfare grows, it’s easy to imagine that every major corporation will want to spend more on cybersecurity. This could be a massive tailwind for a company like CrowdStrike.
Additionally, CrowdStrike estimates that cloud security is currently underfunded. In 2020, companies spent just 1.1% of their total cloud IT budget on security. According to the International Data Corporation (IDC), this number should be closer to 5-10%. The reason this number is so low is most likely due to a lack of a real catalyst. It’s the same reason that most people don’t own a state-of-the-art home security system. If you’ve never experienced a break-in then there’s no real reason to spend money on a security system. It’s not until after someone steals your valuables that you feel a need to upgrade your security.
For many corporations, a potential cyberwar with Russia could be the catalyst they need to increase cybersecurity spend. If Russia targets a major U.S. organization, it will incentivize all other companies to bolster their online security.
No. 2 Check Point Software Technologies (Nasdaq: CHKP)
Check Point Software is one of the world’s largest providers of IT security products. It’s portfolio of products includes both software and hardware. Overall, it has solutions for network security, endpoint security, cloud security, mobile security, data security and security management.
Its two main products are CloudGuard and Harmony. CloudGuard provides cloud network security. Harmony provides endpoint security. Quarterly revenue for these services increased from $180 million to $204 million in Q4 2021. This represents a 14% increase. Overall, Check Point Software reported $2.17 billion in annual 2021 revenue. It also reported net income of $815.6 million. This works out to a net profit margin of just over 37%.
In Q4 2021, Check Point had an even stronger profit margin. For the quarter, it reported a net income margin of 49%. This means that Check Point is making 49 cents of profit for each dollar it earns. This past year wasn’t an outlier either. Check Point’s annual net profit margin has hovered around 40% since 2017.
According to its most recent investors report, this is profitability is allowing them to “leapfrog” the industry. On top of this, companies around the world will probably be looking to increase their cybersecurity spend in 2022. This rare perfect storm is what makes Check Point one of the best cybersecurity stocks to buy for the coming year.
No. 1 Zscaler (Nasdaq: ZS)
Zscaler is a leader in cloud security. Its bread and butter is its Zero Trust Exchange. This platform is essentially an intelligent switchboard. It ensures that that there is secure communication across different parties. For example, it helps secure user-to-app, app-to-app, and machine-to-machine communications. This platform is one of the main reasons that Zscaler is one of the best cybersecurity stocks to own.
To visualize Zscaler’s Zero Trust Exchange, imagine going through an international airport. This is the process to get through the aiport:
- Security checks your ID/passport.
- They assesses your threat level based on a number of factors
- You run your luggage through an x-ray machine.
- Security clears you to proceed to your approved destination only.
Zero Trust Exchange does the same thing but with communication between parties. So far, Zero Trust Exchange has proven to be very effective. In 2021, Zscaler reported annual revenue of $673 million. From 2017-2021, Zscaler’s annual revenue has increased by 52% CAGR. During this time, it’s also reported an 81% gross margin.
Part of the reason for Zscaler’s success is its land-and-expand strategy. “Land and expand” means that it prioritizes growing customer account spend over time. Right now, Zscaler has 1,480 clients spending over $100,000 annually. This is up 52% from 973 clients in 2020.
Additionally, Zscaler is also still a founder-led business. It was founded in 2007 by Jay Chaudhry, who still serves as the CEO. In general, founder-led businesses tend to perform better than once the founder has left.
Major Headwinds For Cybersecurity
On top of the Russia and Ukraine conflict, Zscaler is riding several other tailwinds. All of the following have been powering Zscaler’s growth in the past few years:
- Rise of cloud office applications (Office 365)
- Remote work
- Public cloud usage (Azure, AWS)
- Internet of Things
- 5G and edge computing
Even before the Russia and Ukraine conflict, it’s been a good time to be in cybersecurity. Most of these tailwinds don’t seem like they’re slowing anytime soon.
I hope that you’ve found this article valuable in determining three of the best cybersecurity stocks! As usual, please base all investment decisions on your own risk tolerance and research.
About Teddy Stavetski
A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.