The ongoing digital transformation of the global economy created massive wealth for investors as a defining theme in the stock market. As technology plays an increasingly larger role in our daily lives, the rise of digital threats targeting people and organizations has made cybersecurity more important than ever.
Companies offering innovative solutions to secure online networks and sensitive information stand to benefit from a significant growth opportunity for the foreseeable future.
Here are two cybersecurity stocks that could make a great addition to your portfolio.
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1. Palo Alto Networks
Palo Alto Networks (PANW -1.23%) is recognized as a cybersecurity pioneer and the first pure play in the industry to reach the milestone market capitalization above $100 billion late last year. That position as the world's biggest security player represents a major competitive advantage through its brand recognition and market influence, highlighting a key part of the stock's attraction as an investment opportunity.
Palo Alto found success by introducing several disruptive innovations while building a comprehensive cybersecurity platform covering network security, endpoint security, and cloud security. The stock returned 394% in the last five years, capturing a wave of strong growth and accelerating profitability.
In the last reported fiscal fourth quarter (for the period ended June 30), Palo Alto Networks reported a 12% year-over-year revenue growth while earnings per share (EPS) increased by 5%. More impressive was the momentum in annualized recurring revenue (ARR) from next-generation security products, which grew by 43% year over year, suggesting a runway into 2025 and beyond.
The company believes its ARR for next-generation security including zero-trust solutions can triple in size by fiscal 2030. Management is citing strong demand for recent subscription-based product launches incorporating artificial intelligence (AI) tools as a strategic focus for the company.
In terms of valuation, shares are trading at 53 times their consensus year-ahead EPS as a forward price-to-earnings (P/E) ratio. While that multiple may seem expensive, the premium is justified given the company's leadership and positive outlook. The expectation for Palo Alto Networks to consolidate market share and deliver strong earnings should allow shares to trend higher over the long run.
2. Fortinet
Fortinet (FTNT -1.24%) is another cybersecurity leader that competes with Palo Alto Networks in several categories but has key differences in its technology approach. In this case, the company stands out with an emphasis on combining specialized hardware products with its proprietary software to protect networks from threats such as unwanted access or hacker intrusion.
Even as cloud-based protection can represent a viable cost-effective solution with scale advantages for many applications, firewall appliances integrated with security features still play a critical role in secure networking. Fortinet's FortiGate firewall commands more than 50% of the global market share as a cornerstone for the company's broader operating system.
Indeed, Fortinet is positioned to benefit from the rise of AI and related data center infrastructure. Through 2028, the company sees the secure networking market growing by an average annual rate of 15% as a driver for the business. Fortinet is also betting big on its own AI capabilities, incorporating machine learning and automation for optimized threat detection and security monitoring.
In the near term, Fortinet is guiding for full-year revenue growth above 10% from 2023 while its EPS target of around $2.02 represents a 25% increase from last year. Even with shares up 31% over the past year and currently trading near an all-time high, I believe the rally can keep going. Compared to Palo Alto Networks, Fortinet stock trades at a lower forward P/E of 33, which I believe makes it the value pick of the two.
The big picture for investors
Secular tailwinds make cybersecurity one of the most exciting segments of the technology sector with the potential to reward shareholders over the next decade. I believe Palo Alto Networks and Fortinet both deserve a buy rating and are good options to capture the high-level themes driving the cybersecurity market.
