Top Three Picks for Cybersecurity Stocks

Cybersecurity companies are back in the spotlight. While the news hasn’t been necessarily been good, there are opportunities for long-term investors.

The massive breach of AT&T’s customer data has underscored the growing prevalence of online data theft and the urgent need to protect sensitive information and systems. This was further highlighted by the recent chaos around CrowdStrike’s faulty update on July 19, which triggered a massive technology outage, locking millions of users out of their Windows devices and causing  economic disruption. That news sent CrowdStrike’s stock down by a double-digit percentage, but it also drew attention to how ubiquitous the technology is, and Morningstar analyst Malik Ahmed Khan thinks this creates a buying opportunity.

The increasing threat of cybercrime has prompted governments and corporations to invest billions in bulking up their digital security. The secular trend has created a significant revenue opportunity for companies that specialize in internet-enabled protection services and products.

Fortinet FTNT

Analyst: Malik Ahmed Khan

Fortinet, a cybersecurity vendor with a platform-based approach, offers products in network security, cloud security, zero-trust access, and security operations to more than 700,000 customers worldwide. Sales of its subscriptions and support-based business account for the bulk of its revenue.

Fortinet stands to materially benefit as secular tailwinds in security and vendor consolidation increase its appeal to its clients. “The firm’s established customer switching costs, buttressed by its increasingly potent network effect, will allow Fortinet to continuously gain and expand the number of clients,” writes Khan.

The company’s wide economic moat is built on strong customer switching costs and the network effect inherent in its offerings. “Fortinet’s platform approach to cybersecurity, by combining key aspects of a business’ security needs under one umbrella, has also enabled the firm to grow its wallet share among existing clients while adding new ones,” says Khan, who pegs the stock’s fair value at US$77, and forecasts revenue to grow at a 14% annual rate over the next five years. He adds that the wide-moat company is poised to generate excess returns on invested capital over the next two decades.

Khan contends that leading cybersecurity firms like Fortinet are well-positioned to benefit as digital threats intensify, with the economic consequences of a data breach growing, including punitive fines for customer data theft.

CrowdStrike CRWD

Analyst: Malik Ahmed Khan

A cloud-based cybersecurity company, CrowdStrike specializes in advanced security areas, protecting devices, cloud systems, user identities, and security operations. The Falcon platform is the crown jewel of the company’s product offerings, designed to stop breaches using a unified set of cloud-based technologies that prevent all types of attacks, including malware.

“We view CrowdStrike as a leader in endpoint security, a prominent part of the cybersecurity stack that protects an enterprise’s endpoints from nefarious activity,” Khan writes.

However, CrowdStrike shares are down over 20% since the global technology meltdown sparked by a faulty software update from the company. Khan thinks that shouldn’t deter investors.

“We continue to view CrowdStrike as a high-quality security vendor with an exceptional track record of profitable growth that we see continuing,” Khan says. “While we viewed CrowdStrike’s shares as overvalued before the chaos, we are not as pessimistic as the market about the outage’s impact on the firm’s business.” With the decline, Khan sees CrowdStrike stock as “marginally undervalued.”

He explains: “CrowdStrike’s robust platform, strong relationships with end customers and value-added resellers, and its expansive platform that stands to benefit from vendor consolidation within security, all underscore our confidence in the firm’s long-term potential.”

While the massive outage caused by CrowdStrike’s software update gone wrong “creates near-term headwinds, our base case doesn’t include a doomsday scenario with substantial customer churn and materially lower medium-to-long-term top-line expansion.”

Zscaler ZS

Analyst: Malik Ahmed Khan

Zscaler provides cloud-native cybersecurity solutions to primarily enterprise customers. The company’s software-as-a-service solutions can be generally divided into two categories: Zscaler Internet Access, which ensures secure access to external applications, and Zscaler Private Access, which secures access to internal applications.

The company’s strategic foresight ensures its products and solutions are ideally placed to ride the wave of long-term industry trends. The firm is “a pioneer and leader in zero-trust security solutions, an area of cybersecurity primed for growth due to secular trends such as increased digitization of an enterprise and a convergence of networking and security,” Khan writes.

The firm’s strong net and gross retention metrics are evidence of its sticky product portfolio that consistently delivers value and maintains user loyalty as customers are hesitant to leave Zscaler for fear of losing their threat detection and response capabilities.

“While ZIA and ZPA are two key solutions, both of them consist of many individual modules that allow Zscaler to expand revenue from an existing client by either selling it more seats or increasing the usage of its solutions,” asserts Khan, who appraises the stock to be worth US$213 per share and projects its revenue to grow at a 28% clip annually over the next five years.

Notably, Zscaler’s security solutions process over 250 billion requests daily. This extensive data set lets the company identify threats and new threat signatures, which are then utilized to enhance the security measures for all its clients.

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