Investing in Cybersecurity Stocks

Cybersecurity spending has soared since the COVID-19 pandemic began. Organizations are faced with new security challenges as cloud computing and remote work have become essential. As a result, many cybersecurity stocks were top performers in 2020 and 2021, boosted by strong demand for next-gen security software. The bear market of 2022 has put a damper on some of the highest flyers, but cybersecurity remains a top investment theme.

According to the Identity Theft Resource Center, the number of data breaches set a new record in 2021, with the number of incidents jumping 68% over 2020 and up 23% from the previous high in 2017. Data breaches were up another 14% year over year during the first quarter of 2022. Overall, cybercrime is on the rise at a double-digit percentage pace.

It shouldn’t be surprising that global spending on cybersecurity is expected to exceed $170 billion in 2022 (up about 13% from 2021) and will likely continue to be a high-growth industry for years. Cybersecurity stocks are a red-hot niche of the tech industry, so knowing how to invest in them can yield some big returns in the decade ahead.

Top cybersecurity stocks

Here are some of the top cybersecurity stocks to own in 2022 and beyond:

Data source: YCharts. Market cap as of June 27, 2022.

Cloud security, identity management, and legacy security vendors

As cloud computing has quickly grown into an industry worth hundreds of billions per year, sales of security software that’s cloud-native (built in and for the cloud) have skyrocketed. These leaders in the space have some of the most promising long-term potential:

1. CrowdStrike Holdings

A cloud-native software company, CrowdStrike Holdings (NASDAQ:CRWD) provides endpoint security -- protection for devices such as laptops, PCs, and servers, and any other device connected to a network. Because it’s cloud-based, CrowdStrike is particularly well-suited for supporting remote work.

CrowdStrike’s software uses machine learning (a type of artificial intelligence) to detect security breaches and hunt down threats. It’s also easy to deploy to the millions of people working from home and the billions of machines connected to the internet. The company has steadily increased the number of modules on its platform to help its customers, and it has new integration agreements with other tech companies to make data protection more consistent across an organization’s IT infrastructure.

The premium-priced stock has been hit hard during the first half of 2022, but CrowdStrike’s sales have been booming nonetheless. It’s also highly profitable as measured by free cash flow. In an increasingly mobile world with more devices continually coming online, CrowdStrike is poised to continue growing at a brisk rate.

2. Zscaler

Another cloud-native security vendor, Zscaler (NASDAQ:ZS) works in tandem with endpoint security services to help keep data secure. The company has been increasing its sales at a rapid pace and is another of the largest pure-play cybersecurity stocks as measured by market cap -- even though the stock itself has sold off almost 50% through the first half of 2022.

Zscaler got started with a software-as-a-service product designed for cloud computing protection, but it has since added new internet security and end-user monitoring products. End-user monitoring is increasing with so many people now working from home. And, with global spending on cloud computing expected to exceed $1 trillion annually this decade, Zscaler is well-positioned to profit from this massive secular growth trend.

3. Okta

Okta (NASDAQ:OKTA) is a pioneer of identity and access management, which rethinks traditional security by using what’s called zero-trust architecture. This type of identity management constantly requires verification of a user before allowing access to data and applications. If legacy security is a castle with a wall and a moat, then zero-trust security acts more like a counterspy agency.

In an increasingly mobile and cloud-based world, Okta’s identity management software has been in high demand. Businesses often have a complicated web of stakeholders, including employees, third-party contractors, suppliers, customers, and the like. The sheer size and complexity of web-based applications has driven Okta’s growth story and attracted some attention, too. Fellow identity management company ForgeRock (NYSE:FORG) had a successful public debut in 2021.

Okta is firmly in the lead in this branch of security. A cyberattack in January 2022 affected two of its customers, helping accelerate the decline of its stock during the bear market. However, Okta remains in growth mode as new customers adopt its software to manage identity and access security.

4. SentinelOne

SentinelOne (NYSE:S) is another recent pure-play cybersecurity company to be publicly listed. Its initial public offering (IPO) in June 2021 raised $1.2 billion in cash and valued the company at $10 billion, making SentinelOne's IPO the largest ever for a cybersecurity company. However, a rough start for the stock market in 2022 and slowing revenue growth at SentinelOne has sent the stock below its IPO price.

Despite a slowdown, this small company still doubled sales year over year during the first few months of 2022. It operates a cloud-based endpoint security platform, which puts it in competition with CrowdStrike. Its ability to automatically detect and resolve cybersecurity threats is being well-received in the market.

5. Palo Alto Networks

Hailing from an era that predates cloud technology, Palo Alto Networks' (NYSE:PANW) specialty is rooted in firewalls -- devices that protect traffic into and out of physical locations such as offices and data centers. While its legacy services still experience plenty of demand, the real growth is in the cloud.

The company's highly profitable platform has helped it to acquire more than a dozen smaller cloud-native businesses in the past few years. As a result, Palo Alto Networks has given its security operation a serious makeover. Management says its acquisition spree is over for now, and it predicts double-digit percentage revenue growth in the years ahead. This steady growth and market leadership has helped make its stock one of the best performers among cybersecurity companies in 2022.

Palo Alto Networks is the largest pure-play cybersecurity operation by revenue and market cap. Now also a leading cloud security provider, this legacy business is highly competitive in the cybersecurity industry. Shares trade for a relative value compared to its younger, high-flying, cloud-native rivals.

6. Fortinet

Another legacy security software provider, Fortinet (NASDAQ:FTNT) is also one of the largest cybersecurity companies in the world by revenue and market cap. Like its peer Palo Alto Networks, it has maintained double-digit percentage growth and is highly profitable. But, unlike Palo Alto Networks’ acquisition spree, Fortinet has instead invested in its organic development of cloud security to remain competitive.

One of its developments is a recently announced software-based internet security product being built and deployed with one of Europe’s leading telecom providers, Telefónica Tech (NYSE:TEF). The company also recently announced a partnership with Singapore's Quantum Engineering Programme to develop next-gen security for quantum computing.

Fortinet is also a top provider of firewalls. Its best-in-class hardware continues to generate more revenue as many organizations turn to Fortinet for help when building new data centers and servers. For investors looking for a good balance of both sales and profitability growth, Fortinet is one of the best security stocks on the market.

Infrastructure monitoring and content delivery networks

Cloud computing creates, uses, and stores more digital data, and an organization’s IT infrastructure can quickly become more complex by an order of magnitude. Companies that monitor these cloud-based operations are critical to cybersecurity, as are companies that manage the web content and apps themselves. Here are some top names to consider:

1. Splunk

A long-time leader in data analytics, Splunk (NASDAQ:SPLK) provides software that helps companies sift through logs of information, monitor digital activity, and orchestrate responses to data breaches. While its platform predates cloud technology, the company has been migrating customers to newer cloud-based versions of its software.

Data analytics is a fast-growing segment of IT management, and Splunk is a central part of many organizations’ security and monitoring efforts. The company expects its annualized recurring revenue to grow at a double-digit rate over the next couple of years.

However, Splunk has numerous competitors, some with newer and more nimble software for today’s cloud computing needs. But, with its transition to cloud tech still in progress, Splunk is a value stock, especially when considering the company's fundamentals such as revenue and profitability.

2. Datadog

Datadog (NASDAQ:DDOG), a cloud-native platform, is built to collect, monitor, and yield insights on cloud-based data and operations. The company uses AI to help automate the process of monitoring large and complex sets of data, relieving some of the burden of busy IT teams. It’s also been steadily expanding its platform's capabilities with new modules that include cloud-based security and data monitoring.

Data analytics software is a large and fast-growing segment of the tech world, which bodes well for Datadog. Besides Splunk, Elastic (NYSE:ESTC) and Dynatrace (NYSE:DT) are two other promising software makers to consider in this space.

3. Akamai

As a content delivery network (CDN), Akamai (NASDAQ:AKAM) ensures that data securely arrives at its intended destination. With the amount of data traveling across the internet steadily on the rise, CDNs are becoming increasingly important. More people than ever are using the web for everything from entertainment to work. To bolster its network security offerings and protect its customers from ransomware attacks, Akamai acquired Israel-based Guardicore in 2021 and cloud infrastructure platform Linode in early 2022.

CDNs are internet infrastructure that maintain the internet “freeway” on which data travels. Akamai is a leader in this sector and is also a developer of edge computing technology, which pulls data away from centralized data centers and closer to end users.

Cloudflare (NYSE:NET) and Fastly (NYSE:FSLY), which are newer CDN providers, have a greater focus on edge computing and are competitors to Akamai worth considering.

Related investing topics

Top cybersecurity ETFs

If you'd rather not have to choose among individual cybersecurity stocks, you can consider several exchange-traded funds (ETFs) that enable investors to participate in the growth of the cybersecurity industry as a whole.

Our top picks for cybersecurity ETFs include:

1. First Trust NASDAQ CEA Cybersecurity ETF

With $5.3 billion of assets under management in mid-2022, First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR) is the largest of its kind. The ETF is composed of 38 stocks in the cybersecurity industry and has an annual expense ratio of 0.6%, making it an affordable option.

2. ETFMG Prime Cyber Security ETF

Also notable in this sector is the ETFMG Prime Cyber Security ETF (NYSEMKT:HACK). Holding 64 stocks, this ETF invests in many relatively small companies in the cybersecurity industry. The fund manages $1.7 billion of assets and also has an expense ratio of 0.6%.

3. Global X Cybersecurity ETF

A newcomer to the cybersecurity ETF space, the Global X Cybersecurity ETF (NASDAQ:BUG) launched at the end of 2019. The fund managed $1.2 billion of assets in mid-2022 and has an expense ratio of 0.5%. The Global X Cybersecurity ETF is also more concentrated, with only 29 stocks in its portfolio. Since its inception, the fund has outperformed its competitors on this list.

How to invest in cybersecurity stocks

When considering how to identify the best cybersecurity stocks, remember that cloud-native companies have a natural competitive advantage with the latest software technology. However, legacy companies generate ample profit margins and have the cash to make updates. Companies that monitor cloud-based operations and those that manage web content and apps are also increasingly important to the online security of a company.

Cybersecurity ETFs are another great option and can be purchased with your favorite cybersecurity stocks. For all of your investments, stay focused on the long-term potential of these fast-growing companies. Technology that helps the digital world to stay safe is rapidly evolving and proliferating, and cybersecurity companies will reap the financial benefits accordingly.