As if cybercrime wasn't already a big enough problem, the COVID-19 pandemic has accelerated attacks. With more employees working from home and fewer people on site at central offices, the corporate border has frayed, making companies more vulnerable to various kinds of a cybercrimes.
According to Grand View Research, the cybersecurity market reached $156.5 billion last year across hardware, software, and services, and is expected to grow at a 10% annual rate through 2027. That's a really high growth rate for an entire industry, making it one of the most intriguing for investors over the next decade.
However, with great opportunity comes great competition. That's why you should stick to these best-of-breed cyber stocks for consideration in your portfolio.
CrowdStrike: The disruptor
Cloud-based specialist CrowdStrike (NASDAQ:CRWD) is a potential disruptor in the endpoint protection segment of the cybersecurity market, which the company estimates at $12.8 billion and growing fast.
Though the endpoint segment is fragmented, CrowdStrike's unique AI and cloud-based Falcon platform appears to be a disruptive solution. CrowdStrike jumped from ninth place all the way to the fourth place in the endpoint security market last year, and the three leaders above it all lost market share. That trajectory seems to indicate CrowdStrike could go on to lead this industry in the years ahead versus the mere 5.8% market share it held at the end of 2019.
Endpoint security has become even more critical amid COVID-19, as every employee laptop and mobile device has also become an "endpoint." Look no further than CrowdStrike's 84% overall and 89% subscription growth rate last quarter as evidence its advanced solution is more critical to customers than ever.
The company isn't resting on its laurels, either. CrowdStrike just scooped up private security firm Preempt Security for $96 million to enter the identity security market. CrowdStrike's unique offering in endpoint and eye on other parts of the security market should have legacy players on their toes, and the company looks like a disruptive force in the industry.
Palo Alto Networks: A seamless transition
Of course, some legacy cybersecurity providers have made the transition from hardware and on-premises solutions to cloud and software solutions more seamlessly than others. One that has done an exceptionally good job is Palo Alto Networks (NYSE:PANW).
Through a disciplined organic and inorganic strategy, Palo Alto has built up a high-growth "next-gen" security portfolio, consisting of its Cortex AI threat management detection and Prisma cloud-based products. These "next-gen" solutions have grown at a 97% average rate over the past three years, rocketing from just 8% of Palo Alto's billings two years ago to 20% as of last quarter.
That higher-growth part of the business should buoy overall company growth this year after an impressive 18% growth in the past fiscal year, which ended in June. Even more encouraging, billings growth accelerated last quarter by 32%. That higher level of billings, which includes new business to be recognized in future periods, indicates future revenue will be strong.
After the technology sell-off in the month of September and into October, Palo Alto trades at under 25 times adjusted free cash flow, quite a reasonable price for a high-teens grower, making Palo Alto perhaps the best legacy cybersecurity pick today.
Fortinet: Custom chip could bode well for this networking specialist
Another legacy cybersecurity company transitioning to the new environment is Fortinet (NASDAQ:FTNT). Its numbers look fairly similar to Palo Alto, with 18% revenue growth last quarter and a 35% free cash flow margin. Also like Palo Alto, Fortinet's newer services revenue is growing faster than legacy product revenue. Last quarter, Fortinet grew services 21.6%, higher than the year-ago quarter's services growth of 20.7%, while product revenue grew just 18%. Services encompass a greater portion of the business, making up 66% of revenue last quarter.
The company's leading SD-WAN product is also making up a bigger share of the pie, and Fortinet's solution was the fastest-growing in the industry during the first quarter. That was due to the company's FortiGate 4400F firewall product, which contains Fortinet's custom-designed NP7 network processor, offering a 13x speed boost over basic CPUs that power rival firewalls.
With a more distributed workforce and cloud computing on the rise, fast and secure networking is paramount, which means Fortinet should continue to deliver strong results in this new environment. The stock may not look particularly cheap at 33 times forward earnings, but when you consider the company's high-teens growth and high and increasing margins, it's certainly not overly expensive, especially compared with much of the technology sector.