According to Statista, cybercrime will cost $11.5 trillion this year, but with the shift to the cloud and the proliferation of connected devices, that number could rise to more than $23 trillion by 2027. Not surprisingly, companies are redoubling their efforts to protect sensitive data.
According to research, cybersecurity software spending increased the most among IT product categories in the third quarter. morgan stanley. This is especially interesting because while artificial intelligence has dominated the headlines this year, companies are actually focusing more on improving their security posture.
Investors can take advantage of that opportunity by building a basket of cybersecurity stocks within their portfolios.The reason is as follows crowdstrike holdings (CRWD -0.83%) and Z scaler (ZS 0.25%) It belongs 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 20 software modules covering several cybersecurity categories. This breadth is especially important because most businesses rely on dozens of point products, making security more onerous. But CrowdStrike can ease that operational burden by allowing companies to standardize on a single platform.
While product integration is an attractive selling point, just as important is the unique data that CrowdStrike has amassed as a leader in cybersecurity.To quote forrester research, “CrowdStrike has an advantage when it comes to threat intelligence because it has a broad view of the threat landscape and offers incident response services.” This suggests superior artificial intelligence (AI). Data is the foundation of machine learning, and the benefits of that data result in unparalleled threat protection.
CrowdStrike reported strong financial results in the second quarter. Revenue rose 37% to $732 million, and non-GAAP net income more than doubled to $180 million. But the company has barely tapped into its $76 billion addressable market, and CEO George Kurtz said in an earnings call that “We have a technology, innovation, and mission-driven team to lead the integration of our cybersecurity platform.” And it’s quite large,” he said in an upbeat mood.
Wall Street analysts are also generally bullish. CrowdStrike’s consensus rating is Buy, with a 12-month median price target of $198 per share, implying 15% upside from current price. Morgan Stanley also cited CrowdStrike as one of the software vendors best positioned to monetize generative AI, citing its recently announced natural language interface “Charlotte AI,” and Morningstar said the company is one of the best positioned to monetize generative AI. The company expects annual revenue growth of 31% for the year.
In this context, the current valuation of 15.5 times sales seems reasonable. So investors should feel comfortable adding a small position in CrowdStrike to their basket of cybersecurity stocks today.
2. Zscaler
Zscaler specializes in Zero Trust Network Access (ZTNA) and cloud workload protection. The company’s Security Services Edge (SSE) platform modernizes enterprise networks by handling policy enforcement and threat detection in the cloud rather than in private data centers. This strategy eliminates the need for expensive on-premises security appliances while providing customers with much better security.
In detail, Zscaler operates the world’s largest network security cloud. According to management, this scale is the foundation for strong network effects and ultimately superior threat protection. The Zscaler platform processes hundreds of billions of requests every day and collects hundreds of trillions of security signals along the way. Each signal incrementally improves the AI engine’s ability to detect cyberattacks.
Zscaler is recognized as a leader in the ZTNA and SSE platforms, and both markets should grow rapidly as enterprises pour more capital into cloud migrations and other digital transformation projects.Just consulting gartner predicts that 80% of enterprises will deploy an SSE platform 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 its most recent quarter. The number of customers increased by 14% to 7,700, and the amount spent by the average customer increased by more than 20%. As a result, sales increased 43% to $455 million and non-GAAP net income increased 177% to $101 million. But management remains optimistic about the future, citing its $72 billion market size and market leadership position.
Wall Street is also generally bullish. Zscaler’s consensus rating is Buy, with a 12-month median price target of $185 per share, implying 20% upside from the current share price. Morgan Stanley expects Zscaler to grow revenue by 25% annually over the next five years. In that context, the current valuation of 13.8x sales is fair, and the current multiple is certainly more attractive than the average of the past three years of 32.3x sales. Long-term investors should add a small position in this growth stock to their cybersecurity basket now.
Trevor Jennewine holds positions at CrowdStrike and Zscaler. The Motley Fool owns a position in and recommends CrowdStrike and Zscaler. The Motley Fool recommends his Gartner. The Motley Fool has a disclosure policy.