Cybersecurity has become a necessary expense for almost every business in operation these days. Having inappropriate access to a corporate network by strangers or allowing personal customer information to leak can be very destructive, ruining a company’s reputation and leading to loss of business. Fortunately, there are several cybersecurity operations that specialize in protecting different aspects of a business.
These cybersecurity companies can make big investments, in part because they end up being subscription-based and vital to operations today and tomorrow. Three companies set to benefit from this long-term growth potential are CrowdStrike Holdings ( CRWD -2.70% ), Okta (OKTA -2.88% )and Z-scale ( ZS -3.10% ). You don’t have to worry about picking a winner from this trio either, as they work together and focus on protecting various parts of a company’s network.
CrowdStrike protects network endpoints, such as laptops or mobile devices, with its cloud-based Falcon platform. The software is a more advanced version of antivirus software likely installed on personal devices. What makes it more powerful is its Threat Graph, which uses artificial intelligence to collectively analyze data from all of its customers and stop breaches before they happen.
This solution has successfully captured large customers (companies with 7,500 or more employees) with an estimated market penetration of 35%, including 65 of the Fortune 100 and 15 of the top 20 US banks. Additionally, with only 3% penetration in mid-market enterprises and less than 1% in public sector and small businesses, CrowdStrike has a wide avenue for growth.
In CrowdStrike’s fiscal year 2022 (ended Jan. 31), the company generated annual recurring revenue (ARR) of $1.73 billion, up 65% year-over-year. However, management estimates that it can achieve at least $5 billion in ARR by the end of FY2025, representing a compound annual growth rate of approximately 42%. Having already achieved a free cash flow (FCF) margin of 30%, CrowdStrike will generate at least $1.5 billion in cash every year after fiscal 2025 if it can meet its goal.
With confident management, strong cash flow, and a large customer base yet to be won, CrowdStrike is my top choice for cybersecurity.
Okta’s solution focuses on identity management, ensuring that the person accessing the network or account is who they say they are. Through single and multi-factor authentication, Okta offers solutions for businesses to manage internal employee authentication and customer verification. Similar to CrowdStrike, Okta’s solutions have received rave reviews from giants such as T-Mobile United States, fedexand Major League Baseball.
In 2021, Okta purchased Auth0, a platform that enables user authentication from any platform or coding language. This solution matches Okta’s pre-existing product offering, but also skewed financial results for fiscal year 2022 (ended Jan. 31). With Auth0, revenue grew 56% year-over-year to $1.3 billion. Without it, revenue rose 39% to $1.16 billion. As Okta fully integrates Auth0, it expects cross-selling and international opportunities to arise, which will further drive revenue growth.
Okta’s long-term growth projections aren’t as ambitious as CrowdStrike’s, but they’re still solid. By FY2026, it expects to have $4 billion in revenue (a 35% annual growth rate) with a 20% FCF margin.
Although Okta is not growing as quickly as CrowdStrike, a sustained growth rate of 35% will produce fantastic results for shareholders over four years.
Zscaler’s Zero Trust Exchange allows data to flow from networks to endpoints securely. Whether the data is on a website or in the cloud, Zscaler ensures that employees everywhere can access the information they need.
Zscaler reported quarterly sales growth of 63% year-over-year to $256 million for its second quarter of fiscal 2022, which ended Jan. 31. It also achieved a 12% FCF margin, allowing Zscaler to add more cash to its balance sheet. Although Zscaler does not have long-term projections, the forecast for fiscal 2022 is set at 56% revenue growth.
Zscaler also announced that it has achieved 100% renewable energy use in its offices and data centers through direct purchases and renewable energy credits. This achievement will undoubtedly strengthen Zscaler’s reputation with its client base and funds focused on environment, social and governance (ESG), both of which increase the ownership base of the stock.
Which stock is the best buy?
In the wake of the growth stock sell-off, each company has seen its valuation reduced over the past year.
With most valuations back to pre-pandemic levels, investors need not worry about overpaying for any of these stocks.
My top choice for cybersecurity is CrowdStrike, and it probably will be for many years to come. With its rapid growth rate, superior FCF margins, and vast potential customer base to capture, CrowdStrike outperforms Okta and Zscaler. However, spreading the risk by buying a basket of cybersecurity stocks is also a great option. In this case, Okta and Zscaler are a great addition to CrowdStrike if they form a cybersecurity basket.
Industry tailwinds are blowing in favor of cybersecurity; investors should allocate their portfolios accordingly for this decade-long opportunity.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.