Damages inflicted by cybercrime will total $11.5 trillion this year, according to Statista, but cloud migration and the proliferation of connected devices could push that figure north of $23 trillion by 2027. Not surprisingly, enterprises are redoubling their efforts to safeguard sensitive data.
In the third quarter, cybersecurity software saw the largest spending increase of any IT product category, according to a survey from Morgan Stanley. That is particularly interesting because artificial intelligence has dominated headlines this year, but businesses are actually more focused on improving their security posture.
Investors can capitalize on that opportunity by building a basket of cybersecurity stocks within their portfolios. Here’s why CrowdStrike Holdings (CRWD 2.98%) and Zscaler (ZS 3.25%) belong in that basket.
1. CrowdStrike Holdings
CrowdStrike is a recognized leader in multiple cybersecurity end markets, including endpoint (device) security, cloud security, and managed detection and response. Its platform integrates more than two dozen software modules that address several cybersecurity categories. That breadth is especially significant because most enterprises rely on dozens of point products, making security more onerous. But CrowdStrike can reduce that operational burden by allowing enterprises to standardize on a single platform.
Product consolidation is an attractive selling point, but equally important is the proprietary data CrowdStrike has amassed as a cybersecurity leader. To quote Forrester Research, “CrowdStrike’s extensive view of threat landscape and incident response services give it an advantage when it comes to threat intelligence.” That hints at superior artificial intelligence (AI) — data is the foundation of machine learning, and the corollary of that data advantage is unparalleled threat protection.
CrowdStrike reported solid financial results in the second quarter. Sales jumped 37% to $732 million and non-GAAP net income more than doubled to reach $180 million. But the company has hardly tapped its $76 billion addressable market, and CEO George Kurtz sounded upbeat on the earnings call: “We have the technology, innovation, mission-driven team, and sizable scale to lead cybersecurity platform consolidation.”
Wall Street analysts are generally bullish too. CrowdStrike carries a consensus rating of “buy” and a median 12-month price target of $198 per share, implying 15% upside from its current price. Morgan Stanley also views CrowdStrike as one of the software vendors best positioned to monetize generative AI, referring to its recently announced natural language interface Charlotte AI, and Morningstar expects the company to grow revenue at 31% annually over the next five years.
In that context, its current valuation of 15.5 times sales appears reasonable. So investors should feel comfortable adding a small position in CrowdStrike to their basket of cybersecurity stocks today.
Zscaler specializes in zero-trust network access (ZTNA) and cloud workload protection. Its security service edge (SSE) platform modernizes corporate networks by handling policy enforcement and threat detection in the cloud rather than private data centers. That strategy eliminates the need for costly on-premises security appliances, while also affording customers far better security.
To elaborate, Zscaler operates the largest network security cloud in the world. That scale is the foundation of a powerful network effect that ultimately results in superior threat protection, according to management. The Zscaler platform processes hundreds of billions of requests each day, collecting hundreds of trillions of security signals in the process, and each signal makes its AI engine incrementally better at detecting cyberattacks.
Zscaler is a recognized leader among ZTNA and SSE platforms, and both markets should grow quickly as businesses pour more money into cloud migration and other digital transformation projects. Indeed, consultancy Gartner estimates that 80% of enterprises will implement SSE platforms to unify security across private applications, public cloud services, and the open web by 2025, up from 20% in 2021.
Zscaler reported encouraging results in the most recent quarter. Its customer count increased 14% to 7,700 and the average customer spent north of 20% more. In turn, revenue climbed 43% to $455 million, and non-GAAP net income soared 177% to $101 million. But management remains upbeat about the future, citing a $72 billion addressable market and a leadership position in the market.
Wall Street is generally bullish too. Zscaler has a consensus rate of “buy” and a median 12-month price target of $185 per share, implying 20% upside from its current price. Morgan Stanley expects Zscaler to grow revenue at 25% annually over the next five years. In that context, its current valuation of 13.8 times sales is fair, and the current multiple is certainly more attractive than the three-year average of 32.3 times sales. Long-term investors should add a small position in this growth stock to their cybersecurity basket today.
Trevor Jennewine has positions in CrowdStrike and Zscaler. The Motley Fool has positions in and recommends CrowdStrike and Zscaler. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.