The tech sell-off has been horrendous to the many investors who’ve failed to properly diversify their portfolios. It’s hard to tell when the selling will end. There has already been an excessive amount of damage that’s already been done to many of the hyper-growth names — especially those within Cathie Wood’s ARK line of funds. That said, it’s difficult to judge when the bottom is in, given the trajectory of interest rates and rising recession risks.
Despite all the storm clouds passing through the tech sector, cybersecurity stocks remain an intriguing place to be. Cyberthreats will always be present, regardless of where GDP is for any given quarter. The current slate of beaten-down cybersecurity stocks may be worth a second look, given their recession resilience and secular trends that only stand to get stronger with time.
Though valuations are still a tad stretched on popular cyber stocks, Wall Street remains upbeat despite the negative momentum in the rear-view mirror. In this piece, we’ll use TipRanks’ Comparison Tool to evaluate three cybersecurity plays.
CrowdStrike (CRWD)
CrowdStrike is a major player in the endpoint security space, with growth that continues to shock and awe. The software-as-a-service (SaaS) company, which provides cloud-based protection solutions to its clients, recently clocked in a magnificent first quarter. Per share earnings of $0.31 came in well ahead of analyst expectations of $0.23. Revenue growth, coming in at 61% year-over-year, was also worthy of applause.
Undoubtedly, the world needs the company’s services more than ever, with cyberthreats constantly on the rise. With such a high growth ceiling and an ever-improving ecosystem, CrowdSrike may have one of the stickiest offers in the cybersecurity space.
Though the recent quarterly beat caused a bit of relief for shares of CRWD, it remains off more than 42% from its all-time high hit in the back half of 2021.
As rates stabilize, expect CrowdStrike’s impressive results to become more influential on the stock price than the broader market. Though it’s unlikely CRWD stock can power higher until market-wide fears are put to rest, I view the growth company as one of the babies thrown out with the bathwater. Recession or not, demand is likely to remain robust over the medium term.
At 23 times sales, investors will still have to pay up for the quality growth stock. Wall Street thinks the premium is well worth paying, with the average CrowdStrike price target at $236.87, implying 40.18% upside from current levels.
ZScaler (ZS)
ZScaler is another cloud-based provider of security solutions with a focus on larger enterprise customers. With a wide range of invaluable services, including cloud firewall and data loss prevention, ZScaler is a firm that can continue to grow into the next economic downturn.
From peak to trough, ZS stock lost around two-thirds of its value. Indeed, shares should have never run north of $360 per share. At writing, ZS stock trades at 22.8 times sales, a similar range as CrowdStrike.
With a zero-trust architecture and an ecosystem that could lock in big-league enterprise clientele, ZScaler is bound to be a core holding in any cybersecurity-focused ETF.
Fresh off a third-quarter beat that saw per-share earnings of $0.17, ahead of the consensus of $0.11, ZS stock finds itself on unstable ground. As of the firm’s third quarter, there’s no evidence of a slowdown, with revenue surging 63% year-over-year due to big wins and effective cross-selling. Indeed, it still seems to be full speed ahead for the fast-growing firm that looks poised to build a wall around its ecosystem.
With the enterprise likely to be more resilient than the inflation-hit consumer in the next recession, I expect ZScaler will continue to impress as it looks to stay a step or two ahead of the attackers.
Though Wall Street analysts have been lowering the bar on their price targets over the past month, most remain bullish, with the average ZScaler price target at $210.92, implying 33.01% upside from today’s close.
Fortinet (FTNT)
Fortinet stock has held its ground, besting the three cyber stocks in this piece, down just 33% from peak to trough. Today, the stock is off just 20% from its all-time high, with a much lower 13.3 times sales multiple.
Though the cybersecurity and networking solutions provider is also fresh off a handful of quarterly beats, the stock is cheaper than the likes of a CrowdStrike or ZScaler for a reason. It’s growing slower, with its most recent quarter posting 34.4% in year-over-year revenue growth.
In a rising-rate environment, lower-growth names with more modest multiples may be better buys to protect against further Fed-induced downside. Though Fortinet is profitable, it’s still an expensive stock at over 77 times trailing earnings.
Undoubtedly, competition remains fierce, and the firm will need to keep R&D elevated to stay ahead of rivals and cyberthreats. Recently, the company introduced its AI-powered FortiNDR. The platform leverages the power of self-learning AI in network protection.
Turning to Wall Street, analysts are bullish, with the average Fortinet price target of $360.38, implying 21.35% upside from current levels.
Conclusion
Cybersecurity stocks are the cheapest they’ve been in a while. On the three names, analysts expect the most from CrowdStrike stock and the least from Fortinet stock in terms of year-ahead returns.
However, the industry as a whole is largely projected to do well, as demand consistently increases along with the general digitization trends, as well as the shifting world order and cyber threats from Russian state-backed organizations.
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