In the ever-evolving world of technology, cybersecurity is a pillar that safeguards our digital way of life. As the digitization of everything from banking to healthcare accelerates, the need for robust cybersecurity solutions has become increasingly urgent. According to a recent report from Grand View Research, the global cybersecurity market size was valued at $202.72 billion in 2022. This sector is projected to grow at a compound annual rate of 12.3% from 2023 to 2030. Consequently, cybersecurity stocks are becoming an increasingly compelling avenue for investors seeking long-term growth opportunities.
While most attention gravitates toward high-profile, big-name companies, a treasure trove of cheap cybersecurity stocks often goes unnoticed. These undervalued options could provide a valuable entry point for investors looking to diversify into this critical sector without the exorbitant price tags usually associated with more renowned companies.
Investing in cybersecurity calls for a discerning eye and a meticulous approach. The GuruFocus All-in-One Screener is an indispensable tool for this task, offering a broad spectrum of metrics for evaluation. For a dynamic view of a company's future growth prospects, I consider metrics like the future three to five-year total revenue growth rate. This gauge offers a forward-looking snapshot of how a company is expected to expand its revenues over the next three to five years. Equally important is the future three to five-year earnings per share without non-recurring items growth rate, which sheds light on the projected growth in earnings over the same time frame.
Traditional metrics like the price-earnings ratio may not be applicable for many cybersecurity companies, given that they often operate at a loss during their growth phase. In such cases, the price-sales ratio becomes invaluable, helping to assess whether a company is fairly valued.
The companies I will discuss have risen to the top in terms of growth and value when judged by these forward-looking metrics. This dual advantage makes them standout candidates in a sector as crucial and dynamic as cybersecurity.
Cloudflare
With a year-to-date return of 53%, Cloudflare Inc. (NET, Financial) is painting an increasingly alluring portrait. Investors may be tempted to categorize it among undervalued cybersecurity stocks, but the financial metrics beg for a more nuanced consideration.
The latest second-quarter earnings indicate a revenue surge of 32% year over year, reaching $308.5 million. Nonetheless, the company is swimming in red with a net loss of $94.5 million and a negative net profit margin of 31%. Although the earnings per share beat market expectations by 35%, the net change in cash plummeted by an eye-watering 1,464%. However, the company shines with regard to its three to five-year projected earnings growth rate, ranking better than 98% of industry peers. Its future total revenue growth rate is not far behind, eclipsing 94% of companies in the software sector.
On the flip side, the price-sales ratio stands at an unnerving 19.33, making it more expensive than 94% of companies in its industry. Market sentiments around Cloudflare have been bipolar, exemplified by its recent downgrade by Guggenheim due to execution risks and a subsequent upgrade by Baird following robust quarterly results. Yet, it is essential to step back and consider the long-term prospects. While the short-term metrics are a potpourri of triumphs and challenges, Cloudflare's position in the accelerating cybersecurity market makes it a compelling watchlist addition for those investing in cybersecurity. The company's three-year revenue and Ebitda growth rates are better than 66% and 68% of companies in the software industry.
So, what is the final word? Cloudflare teeters on a fine line between promise and precariousness. While its lofty price-sales ratio could signal overvaluation, the bullish long-term growth estimates provide a counterweight. Investors must ask: Is Cloudflare's projected performance enough of an antidote to its current financial ills? Given the company's strategic importance in an industry marked by rising cyberthreats, this question becomes increasingly relevant. Therefore, while Cloudflare may not tick all the boxes for a cheap cybersecurity stock to buy, its robust growth projections make it a tempting candidate for those who see value in high-growth, high-risk plays.
CrowdStrike
In the burgeoning landscape of cybersecurity stocks, CrowdStrike Holdings Inc. (CRWD, Financial) commands attention with its remarkable year-to-date return of 59%. The company recently revealed its fiscal second-quarter results for 2024, which were nothing short of impressive. With net income swinging from a loss of $49.3 million to a gain of $8.5 million, CrowdStrike not only broke the bearish mold, but shattered Wall Street's expectations. Further, the company registered a revenue surge of $731.6 million, exceeding analysts' projections and contributing to an annual recurring revenue of $2.93 billion. These numbers reinforce CrowdStrike's role as a robust player in the cybersecurity realm and could make it a compelling consideration for investors looking for undervalued cybersecurity stocks.
Beyond the numbers, CrowdStrike CEO George Kurtz highlighted the artificial intelligence-powered Falcon platform's native capabilities, emphasizing its unique market position in cloud, identity and next-generation security information and event management (SIEM) businesses. The company has set its sights on ambitious targets, expecting a total revenue between $775.4 million and $778 million for the current quarter, accompanied by 74 cents in adjusted earnings per share. Moreover, for the full fiscal year, management anticipates total revenue between $3.03 billion and $3.04 billion, with an adjusted earnings of $2.80 to $2.84 per share.
Given its commanding three-year revenue growth rate of 44%—which ranks better than 91% of companies in the software industry—it is hard to argue against CrowdStrike's robust growth trajectory. The company also boasts a three-year Ebitda growth rate of 39%, a future three to five-year earnings per share growth rate of 32% and a future three to five-year total revenue growth rate of 29%, all of which outperform most industry peers. However, it is worth noting that its price-sales ratio of 15.45 ranks worse than nearly 91% of software companies, potentially signaling an inflated valuation. Overall, as CrowdStrike continues to impress both in terms of financial performance and technological innovation, it positions itself as a cybersecurity stock to keep an eye on.
