In 2019, the NotPetya cyberattack cost U.S. multinationals approximately $10 billion in damages. NotPetya was malware used by Russian hackers to attack Ukraine, but it went beyond its intended target. It was the largest single attack by a state-sponsored entity in the history of the World.

Again, this was an unintended strike on the U.S.. What happens when there is a focused state-sponsored assault?

The Biden Administration and U.S. Cybersecurity and Infrastructure Security Agency (CISA) warned U.S. corporations of “evolving intelligence” around Russian cyberattacks targeting industries from energy to healthcare. Officials see credible evidence that hackers are scanning American networks for vulnerabilities.

The business community is on high alert. There are plenty of uncertainties in today’s world. Companies spending on cybersecurity is not one of them.

Cybersecurity is a long-term secular growth story. Every company will need to purchase cybersecurity products to protect itself from threats. One positive is that these products sell value as they can reduce Security spending costs for customers.

Market Research firm Gartner reported Cybersecurity spending rose 13% in 2021 to $172 billion, an acceleration from 8% in 2020. Gartner forecasts 11% growth in 2022 and 2023. A recent Goldman Sachs survey of chief investment officers showed security remains the top spending priority for businesses in 2022.

Here are three cybersecurity companies that you should contemplate adding to your portfolio.

Crowdstrike Holdings Inc. (CRWD)

Crowdstrike is the market leader in endpoint security. Endpoints consist of cell phones, computers, and other devices. CRWD allows customers to determine which of these endpoints are safe and provides platform services that offer a wide range of security options.

Revenues in 2021 increased 66% y/y to a robust $1.45 billion. Q4 cash flow was $159 million with Free Cash Flow of $127 million. CRWD’s Average Revenue per User (ARPU) is rising across customer tiers and its gross retention was the highest in the company’s history at a robust 98.1%.

Management sees a long runway to growth as evident by its guidance for 2025 revenues of around $5 billion. The company’s long-term outlook is for operating margins of 22% and cash flow margins of 30% reflecting pricing power and economies of scale.

Crowd offers customers frictionless trialing, adopting, and expanding spend with ease. Crowd was built to scale Revenue, providing significant platform-based leverage.  The company sustains impressive growth and churns out solid cash flow generation. It is a clean story and solid profit margins warrant a premium multiple.

 

Palo Alto Networks, Inc. (PANW)

Palo Alto has its roots in the firewall network security market, but it aims to build a broad cloud-based security platform.

Four years ago. the company hired Google and Softbank alum, Nikesh Arora, as CEO. He saw an industry that had too many companies selling too many tools. Arora went on a consolidating spending spree that saw CRWD spend over $3 billion to acquire 17 small tuck-in companies.

The moves expanded the company’s capabilities in securing apps that run in the cloud and use data and AI to handle routine alerts which would free up analysts’ time to handle more pressing tasks.

This brought in new customers and allowed PANW to win bigger deals. Its market share is at approximately 4.5% in 2022, up from 2.5% prior to Arora. Management believes it can win as much as 10-20% of the market.

In its most recent quarter, revenue increased an impressive 30% from the prior-year period. Billings growth accelerated in the quarter while the company continued its transition to Cloud/Software products.

Annual Recurring Revenue rose 70% y/y in 2022. The company’s guidance infers a 48% y/y growth rate which is consistent with management’s long-term outlook for Compound Annual Revenue Growth of 40% through 2024.

The chart is a thing of beauty as it has brushed off a 20% decline to start 2022 and rallied back near all-time highs. This move occurred while the rest of the market dealt with significant headwinds. The valuation remains reasonable as it trades at approximately 13x forward sales.

PANW is well-positioned to deliver a fully integrated, end-to-end security platform.

Checkpoint Software Technologies (CHKP)

Checkpoint offers a portfolio of network security, endpoint security, data security, and management solutions to the market.

The company has been losing share in the highly competitive market due to under investment in sales and marketing and over-reliance on channel partners. However, that has changed as CHKP is aggressively hiring industry salespeople from competitors.

Analysts are expecting revenues to accelerate as it increases its investments. Margins will trail as it will take some time for upfront costs to pay dividends.

CHKP kicks off Q1 earnings for the group on April 27. Analysts will pay close attention to revenue growth which stood at a meager 6% y/y in Q4. Subscription revenue growth was 14%, and Deferred Revenues increased by 15%. The company needs to show an acceleration in these metrics.

The valuation is relatively cheap at 8.7x forward sales. Of course, its revenue growth rates justify this being cheaper compared to peers.

The chart is in great shape. Shares rallied from $110 in mid-December to the $145 area while the rest of the market was under pressure. CHKP has chopped around the $135-135 area over the past month in anticipation of this earnings report. An acceleration of revenue could allow this to break above the $145 level.

CHKP has the products and subscription offerings to address customer issues and primary use cases.

The company is a solid defensive stock for an elevated security spending environment.