The Cybersecurity Industry
Investing in cybersecurity stocks delivered better returns than the broader market in 2021, following increasing needs in internet protection associated with the expansion of remote working.
The cybersecurity sector is poised for strong growth in the years to come, as more and more things get connected to the internet. According to a Astute Analytica study, the global cybersecurity market is forecasted to increase by a compound annual growth rate (CAGR) of 13.4% from 2021 to 2027 to an overall size of $346 billion.
The performance of the cybersecurity complex, measured by the First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR), lagged behind the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) in the first part of 2022, but the industry rebounded significantly in the past few days.
In the past few weeks, cybersecurity stocks headed higher as Russia invaded Ukraine. This has attracted awareness on increasing online security risks in the context of digital war. Ukraine’s official websites have been under cyberattacks before the Russian invasion, demonstrating that it is a full-fledged weapon in modern warfare.
Therefore, cyberattacks are likely to build up in the next months. Western countries that imposed sanctions on Russia will probably be exposed to a growing number of cyberattacks, which will benefit these cybersecurity companies.
In this context, the cybersecurity sector is set for renewed interest from investors. These are the top cybersecurity stocks to invest in to benefit from expanding digital security awareness.
Best Cybersecurity Stocks
The cybersecurity thematic is set for renewed interest from investors. To identify the best cybersecurity stocks on the market, I have selected stocks that have cheap enterprise value (EV)/earnings before interest, taxes, depreciation, and amortization (EBITDA), and EV/Revenue metrics. The second criteria I look for is a reasonable level of profitability, measured by net margins and consistent topline growth.
According to these criteria my top cybersecurity picks for March 2022 are:
- F5 Inc. (NASDAQ:FFIV)
- Check Point Software Technologies (NASDAQ:CHKP)
- Fortinet (NASDAQ:FTNT)
- Palo Alto Networks (NASDAQ:PANW)
- Crowdstrike Holdings (NASDAQ:CRWD)
F5 Inc. [FFIV]
FFIV stock provides cloud applications focused on security and performance, enabling users to operate in any architecture, from on-premises to the public cloud.
The stock price of F5 plunged 20.5% since the beginning of the year to $194.37 per share. The company downgraded its guidance for the second quarter of 2022, following increasing concerns about its ability to meet the high demand for cloud environment solutions. This has created an opportunity for investors looking for a cheap and profitable cybersecurity stock.
Nonetheless, the fundamental picture of FFIV remains strong. The cloud application specialist is expected to deliver a net margin of 12.6% in 2022, following a topline growth forecast slashed in half to annual growth of 5.9% to $2.75 billion.
However, F5 is exchanging at low valuation metrics, with 2022e EV/EBITDA of 11.7x and EV/Revenue of 4.02x. This represents an opportunity for investors looking to jump into a large-cap cybersecurity stock.
Check Point Software Technologies [CHKP]
CHKP is a smaller player in the cybersecurity complex in terms of market capitalization. It is, however, one of the world-leading companies in security solutions for internet networks. Check Point mainly provides solutions to protect internet, intranet, and extranet infrastructures.
The stock has outperformed its peers year-to-date, surging by 18.9% to about $138.61 per share. While this constructive momentum is unlikely to slow down due to geopolitical tensions between Russia and Western countries, according to the consensus, CHKP’s growth story remains subdued compared to peers.
Net sales are esteemed to advance moderately in the next two years, up 5.7% to $2.29 billion in 2022 and up 4.9% to $2.4 billion in 2023.
However, the vigorous profitability of the company is appealing for long-term investors. CHKP stock has an expected net margin of 34.7% in 2022, down from 37.6% in 2021. It also stands on a substantial pile of cash of $3.78 billion at the end of 2021, which is a constructive sign for the company in this inflationary environment.
Besides, with a 2022e EV/EBITDA of 14.6x and EV/Revenue of only 6.65x, CHKP has affordable metrics compared to industry peers.
FTNT stock is specialized in the development, marketing, and creation of integrated cybersecurity software and equipment for the protection of networks. The company also provides protection to company and government data.
Fortinet is a mature cybersecurity company, with rapid growth prospects and a beta of 1.15. FTNT’s top line is forecasted to rise by 28.6% to $4.29 billion in 2022. Fortinet’s double-digit net sales growth is however forecasted to decelerate to 20.2% in 2023, reaching an amount of $5.16 billion.
However, the business of FTNT is lucrative, generating an expected free cash flow of $1.55 billion in 2022 and delivering a net margin of 15.9%.
In addition, FTNT has relatively cheap valuation metrics when compared to its growth trajectory. The company is exchanging at an esteemed 2022 EV/EBITDA of 36.7x and EV/Revenue of only 10.2x.
Palo Alto Networks [PANW]
PANW stock is one the most established cybersecurity companies in the industry, delivering innovative products to enable secure digital transformation. The company proposes security platforms that allow corporations, service providers, and government entities to protect users, applications, data, networks, and devices across all locations.
The cybersecurity expert has a year-to-date loss of 4.3% to $532.91 per share. It also has a beta of 1.36.
In addition, Palo Alto’s top-line growth is solid, as net sales are forecasted to advance robustly, up 28.2% to $5.4 billion in 2022 and up 22% to $6.65 billion in 2023.
In terms of bottom-line, the cybersecurity leader is forecasted to reduce net yearly loss in 2022. The consensus of analysts expects a net loss of $333 million compared to a yearly loss of $499 million in 2021.
PANW has attractive valuation metrics compared to other cybersecurity stocks, exchanging at 2022e EV/EBITDA of 41.1x and at a more reasonable EV/Revenue of 9.49x.
Crowdstrike Holdings [CRWD]
CRWD specializes in cybersecurity services and delivers a cloud-based endpoint protection platform to prevent security breaches.
While the company is not expected to generate a profit in the next three years, CRWD stock offers one of the most promising expansion stories of the industry. The company is also riskier than the broader market and has a beta of 1.44.
While Crowdstrike growth trajectory is expected to slow down a bit, it remains one of the highest of our peer group with sales forecasted to jump 63.8% to $1.43 billion this year and 40.4% to $2 billion in 2023.
Besides, CRWD’s free cash flow generation is expected to reach $434 million in 2022, up 48.1% year-on-year, and to advance by 39.4% to $605 million in 2023.
This hasty growth and healthy cash flow generation explain the premium at which CRWD trades. The valuation metrics of CRWD are now standing at 156x in terms of 2022e EV/EBITDA and at 25.8x as to EV/Revenue.
What Are Good Cybersecurity Stocks?
Zscaler (NASDAQ:ZS)and Cloudflare (NYSE:NET) are good cybersecurity stocks. However, they are not good short-term investments. These stocks are trading at stellar valuation metrics and have recently underperformed the cybersecurity complex, indicating an ongoing bearish momentum. In addition, the two cybersecurity firms are not profitable and are expected to continue to burn cash in the next two years.
ZS stock is a cloud security platform, allowing users to safely access authorized applications and services in the cloud, regardless of location. It delivers its solutions using a software-as-a-service (SaaS) business model and sells subscriptions to access its services.
Zscaler is one of the fast-growing cybersecurity stocks of our selection, with a beta of 0.90. The stock price has shrunk 38.5% year-to-date to $195.90 per share, posting the worst performance of our peer group.
Net sales grew by approximately 50% in the past two years and should continue to expand by 55.4% to $1.04 billion in 2022.
ZS stock has not yet generated a profit and is predicted to post a net loss of $373 million in 2022. Nevertheless, the cybersecurity specialist generated a positive free cash flow of $144 million last year and had a net cash position of $589 million at the end of 2021.
At its current price, ZS trades at high metrics in terms of 2022e EV/EBITDA with a ratio of 203x and EV/Revenue of 26.7x.
NET stock is a global cloud services provider enhancing the performance of applications and making them more secure. Among its security products, Cloudflare provides application programming interface (API) shields, bot management, distributed denial-of-service protection, page shields, rate limiting, secure sockets layers, and transport layer security encryption.
With a market capitalization of around $30.27 billion, NET is one of the biggest cybersecurity stocks of our panel. Given the large market capitalization of the company, it has a remarkable equity growth story, with net sales esteemed to progress 41.9% to $931 million in 2022 and 33.7% to $1.24 billion in 2023. However, NET shares are expected to generate a marginal free cash flow of 0.62 million this year, which should jump to $34.6 million in 2023.
Since the beginning of the year, Cloudflare’s stock price has dipped 29% to $93 per share year-to-date. The valuation metrics of the cloud service specialist are stretched, with a massive 2022e EV/EBITDA of 284x and EV/Revenue of 31.5x. However, the recent dip provides an opportunity for investors looking to get exposure to a diversified cybersecurity giant.
Are Cybersecurity Stocks Good Investments?
Yes, cybersecurity stocks are good investments, both because of the increasing needs of a connected world and because international unrest can lead to more cyber attacks. However, as mentioned above, some of these companies, like Zscaler and Cloudflare, are not ideal short-term investments due to their valuation.
Are Cybersecurity Stocks Value Stocks?
Most cybersecurity stocks cannot be identified as value stocks. The cybersecurity sector is still a relatively new industry and many firms continue to grow at a rapid pace. In addition, investments continue to pour into the cybersecurity complex, and few are beneficial. This explains the elevated valuations of cybersecurity firms, which do not make good value stocks.
FFIV and CHKP can potentially be considered value stocks because of high market capitalization and low valuation metrics, but for the moment these are not pure value stocks.
Are Cybersecurity Stocks Growth Stocks?
As indicated, most cybersecurity stocks are growth stocks. ZS, NET, CRWD, PANW, and FTNT are good growth stocks. These companies have increased top-line consistently over the past years and are expected to continue to do so in the following years. This explains the high EV/EBITDA at which they trade.
When Are the Best Times to Buy Cybersecurity Stocks?
Cybersecurity stocks are best buys when a major network or software vulnerability is discovered, in times of rising geopolitical tensions, or if an exogenous shock, like the Covid-19 pandemic, boosts demand for remote work. These times lift cybersecurity spending and inflating the stocks of the industry.
Cybersecurity Stock ETFs
There are various ETFs seeking to replicate the performance of cybersecurity stocks out there and that are exposed to one or more of the stocks listed in this selection. The three most liquid ETFs on the cybersecurity sector are the the First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR), the ETFMG Prime Cyber Security ETF (NYSEARCA:HACK), and the Global X Cybersecurity ETF (NASDAQ:BUG)
Which Cybersecurity Stock Pay Dividends?
None of the cybersecurity stocks of our selection pay dividends.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.