Given the deepening penetration of the internet and the rise of major technologies such as artificial intelligence, the threats from cyberattacks have become greatly enhanced. In fact, the industry was valued at $173.5 billion in 2022 and is forecasted to grow at an 8.9% compounded annual rate to reach an estimated value of $266.2 billion by 2027, according to M&M data. The next decade is uncertain, but we do know that people will need to stay cyber-secure.
In this discussion, I will break down my top two AI-powered cybersecurity stocks for the next decade. Let's dive in.
CrowdStrike
CrowdStrike Holdings Inc.'s (CRWD, Financial) flagship product is called Falcon, a multi-module platform that covers everything from endpoint security to identity protection, cloud security, observability and much more. For clarity, “endpoints” are the end of network devices such as your laptop, cell phone or tablet. These devices are often the most vulnerable to a cyber attack as that is where the human interfaces with it. CrowdStrike is a Gartner magic quadrant leader in endpoint security and thus, is in a prime position to continue to capture this market.
The secret sauce of CrowdStrike is its AI-powered threat detection tool. This collects data from billions of malware and hack-related signatures and companies this with the “security posture” of a device. For example, if you normally access your corporate network from your laptop in New York City and then suddenly your network is connected from Russia, CrowdStrike can detect this.
At a higher level, CrowdStrike simply offers a consolidated technology stack for chief information security officers, or CISOs.
Super financials
CrowdStrike generated strong financial results for the first quarter of fiscal 2024. Its revenue rose by a blistering 42% year over year to $693 million, smashing analyst forecasts by over $16 million.
Taking a step back, CrowdStrike's growth rate has actually slowed down substantially from the 61% growth rate reported in the year-ago quarter. However, I believe this was mainly driven by macroeconomic conditions, which resulted in longer sales cycles among enterprise buyers.
Further, I believe this slowdown is only short term and the rise of AI in popularity could act as a catalyst to reinvigorate the sales growth.
Breaking down sales by segment, the company reported Professional Services revenue of $41.4 million, rising 48% year over year, and international revenue rose by 55%, which is a testament to the global opportunity.
As CrowdStrike is a software as a service company, annual recurring revenue is often used as the "true" top line. In this case, its overall ARR rose by a substantial 42% year over year to $2.73 billion. Its recurring revenue is solid as the company has high retention and continues to upsell its various modules to companies. In fact, 60% of its customers have adopted five or more modules.
CrowdStrike has also launched new AI products, such as Charlotte AI, which enables a cybersecurity leader to easily query information.
A negative is its lack of true GAAP profitability as the company reported a loss of $19.5 million for the first quarter. However, it was an improvement over the loss of $23.9 million reported in the same quarter last year. In addition, the company recorded breakeven earnings per share of $0, topping analyst forecasts by 10 cents.
CrowdStrike timed its initial public offering perfectly in 2019 and managed to raise significant capital, which still sits on its balance sheet today. The business has a staggering $2.9 billion in cash and short-term investments. In addition, it reported total debt of $794.4 million, which is largely long term and manageable.
Valuation
CrowdStrike trades with a price-sales ratio of 14, which is about 54% cheaper than its five-year average.
The GF Value Line also indicates a fair value of $379 per share based on its historical ratios, past financial performance and analysts' future earnings projections. Thus, the stock is significantly undervalued currently.
As an extra data point, guru investors such as Ark Invest's Catherine Wood (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) were buying shares in the first quarter of 2023, which traded for an average price of $116 per share.
SentinelOne
SentinelOne Inc. (S, Financial) is a leading cybersecurity company that is similar to CrowdStrike in that it offers an all-in-one platform solution. In this case, the company's Singularity platform includes AI-powered threat prevention, detection and response.
This covers all parts of an information technology network, from the endpoint to containers and the cloud.
Its behavioral AI puts the data it collects into context or “stories.” This is then used for anomaly detection and rapid response. Its customers include Aston Martin, TGI Fridays, AutoDesk and many others.
SentinelOne is in a fierce battle with CrowdStrike. Both companies list each other's tools on their websites, explaining why their platform is better than the other.
Both platforms are also leaders in endpoint security according to Gartner and PeerSpot reviews.
Strong financials
SentinelOne reported strong financial results for its fiscal first quarter of 2024.
Its revenue of $133.39 million rose by a blistering 70% year over year, despite coming in slightly slower than analyst forecasts.
Its high-ticket customers with over $100,000 in ARR rose by 61% year over year and its $1 million ARR customers grew at an even faster clip.
During the quarter, the business won a new Fortune 10 level customer and now serves over 50% of this prestigious list.
On a product level, the company launched Purple AI, which acts as a “sidecar assistant” by enabling security professionals to gain increased control and visibility into their network.
Moving on to earnings, the company reported a loss of $115 million, which was slightly worse than the $90.3 million loss reported in the prior-year quarter.
A positive is, on a non-GAAP basis, the business reported an earnings loss of 15 cents per share, which beat estimates by 2 cents.
SentinelOne has a robust balance sheet that can weather any economic storm with $1.1 billion in cash, cash equivalents and short-term investments and virtually no debt.
Valuation
SentinelOne trades with a price-sales ratio of 8.63, which is cheaper than CrowdStrike.
Final thoughts
CrowdStrike and SentinelOne are cybersecurity companies fiercely battling for dominance. CrowdStrike is larger on a top-line basis with close to 5 times as much revenue. However, SentinelOne is growing at a faster rate and trades slightly cheaper. Both are solid companies in my eyes and ideal cybersecurity stocks for the next decade.
