According to Cybersecurity Ventures, cybercrime is set to cost the world $9.5 trillion this year, and the damage bill could top $10.5 trillion in 2025. Malicious actors are even using artificial intelligence (AI) to launch highly sophisticated attacks on businesses.
In fact, 64% of the 4,702 CEOs surveyed by PwC earlier this year said generative AI will increase cybersecurity risks in their organization during the coming 12 months alone. Cybersecurity providers are likely to see a rush of spending from their customers in the coming years as the threat posed by AI continues to grow.
That could benefit Tenable (TENB -3.02%) and Zscaler (ZS -1.64%). Shares in those companies are trading 29% and 45% below their all-time highs, respectively, but they could recover all of that ground (and then some) as demand for their advanced protection expands
1. Tenable: A leader in vulnerability management
Tenable develops proactive cybersecurity products to help businesses stay one step ahead of potential threats. Its Nessus platform is the most widely deployed vulnerability assessment tool in the industry, and it's also the most accurate. It actively scans operating systems, devices, and networks to identify weak points so they can be fortified before hackers have the opportunity to exploit them.
But Tenable's product portfolio is expanding, and Nessus is now an on-ramp into a suite of comprehensive products including cloud security, identity security, attack surface management, and more. Tenable tailors its software to specific industries like automotive manufacturing, for example, where cyberattacks are very costly because every minute of downtime is worth $22,000 in losses.
Last year, Tenable launched a new product called ExposureAI, which speeds up data analysis and decision-making through automation. It uses natural language processing to advise cybersecurity managers how best to mitigate potential attack paths. Tenable has the largest repository of exposure data in the cybersecurity industry, which includes 1 trillion counts of threats and vulnerabilities. Since data determines the quality of AI models, the company is ideally positioned to take a leadership position in this segment.
Tenable serves more than 44,000 organizations, including 1,717 customers spending over $100,000 annually on its cybersecurity tools (as of the 2024 first quarter). The company expects to generate a record $904 million in revenue this year, and based on its market capitalization of $5.1 billion, that places its stock at a forward price-to-sales (P/S) ratio of just 5.6. That's a substantial discount to some of its peers in the industry:
PS Ratio (Forward) data by YCharts
Growth does play a role in the valuation investors are willing to pay for a stock. If Tenable achieves its 2024 revenue target, it will have grown by 13% compared to 2023. That's a slower increase than CrowdStrike (30%) and Palo Alto Networks (16%) are expected to deliver. But the gap isn't wide enough to warrant such steep P/S discounts -- investors are currently paying twice the valuation for Palo Alto relative to Tenable for just three points of additional growth.
Plus, Tenable's modest growth comes on the back of careful cost management, which means it isn't investing as heavily in initiatives like marketing. During the first quarter of 2024, that led to an increase of 133% in the company's non-GAAP (generally accepted accounting principles) profit, so it's getting a significant payoff at the bottom line for sacrificing some top-line performance.
As demand for proactive cybersecurity grows, I would expect Tenable stock to make up some ground on its competitors.
Image source: Getty Images.
2. Zscaler: A specialist in zero-trust security
Cloud computing is a revolutionary technology that allows businesses to reach a global customer base and hire employees located anywhere in the world. It creates significant opportunities, but it also comes with risks, which Zscaler is focused on solving.
Management can't physically see remote workers signing in to their organization's network, so how do they know if it's really them, as opposed to a malicious actor who has stolen their credentials? Zscaler's Zero Trust Exchange treats every login attempt as hostile, analyzing not just an employee's username and password, but also their location and the device they are using. It uses those metrics to confirm legitimate sign-in attempts with a higher degree of confidence.
But the Zero Trust Exchange goes even further. It only connects employees to the applications they are authorized to use, rather than the entire network itself. Therefore, even if a hacker breaches the identity security layer, they can't move laterally to access other assets.
AI is behind the entire zero-trust process, making lightning-fast decisions to ensure maximum protection without compromising the user experience. Zscaler processes 400 billion requests every day, which are used to improve its AI models, making them faster and more accurate over time.
Zscaler serves over 7,700 organizations, with 2,922 of them spending at least $100,000 annually (as of the fiscal 2024 third quarter, ended April 30). The company beat its revenue forecast during Q3, prompting management to raise its revenue guidance to $2.14 billion for the fiscal 2024 full year (ending July 31). That would represent growth of 32% compared to fiscal 2023, so Zscaler has an edge on each of the cybersecurity providers I mentioned earlier.
With a forward P/S ratio of just 14.2, it looks like a significantly better value than CrowdStrike, for example.
Zscaler is maintaining that solid growth while carefully managing costs and making substantial progress at the bottom line. It delivered a non-GAAP profit of $139.8 million during Q3, which was an 86% jump from the year-ago period.
Zscaler might be one of the best cybersecurity stocks to own based on its growth, improving profitability, and current valuation.
