Wall Street seems excited about cybersecurity and artificial intelligence (AI) in 2024. Wedbush Securities analyst Dan Ives said cybersecurity will be the best-performing subcategory in technology this year. Similarly, morgan stanley Analysts Hamza Foderwala and Keith Weiss predict that 2024 will be a “big year for cybersecurity” due to rising threats, regulatory tailwinds, and AI innovation.
Ives recently ranked cloud strike (CRWD 2.48%) and palo alto networks (PANW 1.73%) Among his top picks this year. Similarly, Fodderwala ranked both companies among his software vendors best positioned to benefit from generative AI. This bullish sentiment is worth watching closely.
Here’s what investors need to know about these two AI-related growth stocks.
1.Cloud Strike
In 2022, CrowdStrike became the second fastest software company to achieve an annual revenue run rate of $2 billion. In 2023, it became the only pure-play cybersecurity software company with an annual revenue run rate of $3 billion. Last year, the company also made a move to improve profitability based on Generally Accepted Accounting Principles (GAAP). Third-quarter revenue increased 35% year-over-year to $786 million, and GAAP net income improved to $27 million from a loss of $55 million a year earlier.
CrowdStrike is firing on all cylinders and there is reason to believe that will continue. While most companies rely on around 50 different security products, the CrowdStrike Falcon platform includes over 20 modules that span multiple security end markets. This wide range of capabilities gives businesses the opportunity to consolidate spending on fewer vendors as a means to improve operational efficiency.
Additionally, CrowdStrike is recognized as a leader in several end markets, including modern endpoint security and threat intelligence. These areas are especially relevant because endpoint security is the second fastest growing cybersecurity category and threat intelligence leadership shows superior artificial intelligence (AI) and protection capabilities.
In fact, Frost & Sullivan analyst Sarah Pavlak recently wrote: “CrowdStrike is an industry leader in applying artificial intelligence/machine learning to endpoint security, providing unparalleled protection against malware and malware-free attacks both inside and outside the network.” We’re taking advantage of Charlotte AI, a generative AI assistant that can automate workflows for security teams.
Going forward, cybersecurity spending is expected to grow at 12% annually through 2030, but CrowdStrike should outperform the industry as it continues to grow its share. In fact, Morgan Stanley’s Foderwalla believes the company can grow its revenue at more than 20% annually over the long term. In that sense, the current valuation of 23.9 times sales is cheap compared to the average sales of 29.3 times over the past three years, but it is by no means cheap.
Patient investors who are used to volatility should consider buying a small position in this growth stock now. CrowdStrike may or may not be a profitable investment in 2024, but the company is positioned to create value for shareholders over the next 5-10 years.
2. Palo Alto Networks
Palo Alto Networks was one of the top 10 performers S&P500 Its stock price has risen in the last year, and it recently became the first company specializing in cybersecurity to reach a market capitalization of $100 billion. A strong report for the first quarter of fiscal 2024 (ending October 31) boosted its upward momentum. Revenue increased 20% to $1.9 billion, and non-GAAP net income increased 75% to $266 million. Investors can expect similar momentum in the future.
Like CrowdStrike, Palo Alto also offers a wide range of cybersecurity products, giving businesses the opportunity to consolidate their spend with fewer vendors. The company’s portfolio covers cloud security, network security, and security operations, and it applies AI across its products to great effect. Palo Alto has gained a strong presence in all three of his vertical markets and has garnered much praise from industry analysts.
in particular, forrester research Palo Alto considers itself a leader in cloud workload security and the broader Zero Trust platform market. Similarly, International Data Corp. considers the company a leader in zero trust network access.and gartner Palo Alto recently recognized Palo Alto’s leadership in Secure Access Service Edge (SASE) platforms, a category that represents the convergence of networking and security capabilities. Specifically, Gartner predicts that 80% of enterprises will adopt SASE products by 2025, up from his 20% in 2021.
Looking forward, Palo Alto expects its addressable market to grow at 15% annually, reaching $210 billion by 2028. That includes $80 billion for zero trust networking, $40 billion for cloud security, and $90 billion for security operations. With a strong presence in all three verticals, Palo Alto is well-positioned to outperform the industry, especially as it leans toward AI innovation.
In the words of Morgan Stanley’s Foderwalla: “With large proprietary datasets and market leadership across multiple major security categories, we believe: [Palo Alto Networks] is best positioned among pure security vendors to deliver AI-driven security automation. ”
Management is targeting annual sales growth of 18% over the next three years. Considered in that context, Palo Alto’s current valuation of 15.9 times sales appears reasonable, albeit at a significant premium compared to its three-year average of 10.3 times sales. . Patient investors should consider buying a small position in Palo Alto stock today.