3 best cybersecurity stocks to buy in the long run
The world is going digital at a rapid pace in the wake of the pandemic, and companies slow to update their operations or take a lax approach to security face real consequences. The generalized exploitative hack Solar winds (NYSE: SWI) and the closure of Colonial Pipeline are just two examples.
According to the FBI, reported cybercrime doubled in 2020 with nearly 792,000 incidents reported in the United States alone. There is clearly an opportunity for cybersecurity services to grow given the overwhelming need to protect technological systems.
Dynatrace (NYSE: DT), Fortinet (NASDAQ: FTNT), and Cloudflare (NYSE: NET) are all near all-time highs, but they’re great long-term buys right now given the growing demand for security and surveillance technology. Here’s why.
Dynatrace: A New Layer of Defense in the Cloud Age
The advent of cloud computing makes businesses more agile and efficient, but the massive amount of data flowing through an IT operation also makes security more difficult than ever. Layers of protection are a necessity, as are software that can help automate monitoring and reporting of potential issues for overworked IT teams.
Enter Dynatrace, the leader in cloud observability and application performance monitoring software. The company’s suite of services helps automate the tedious work of keeping cloud-based operations running smoothly and overlays its system on AI to recommend fixes. Technology researcher Gartner recently called Dynatrace’s cloud suite by far the best among its peers as Microsoft, Cisco, Datadog, and Splunk.
Applications are an increasingly important part of the daily workflow of sprawling businesses, and if those behind-the-scenes systems fail, it can be a disaster for a business. Dynatrace has thus found a constant stream of important new customers over the past few years with its infrastructure monitoring modules, and has broadened its relationship with existing customers with new features such as application security.
It closed its fiscal year ended March 2021 with annual revenue growth of 29% to $ 704 million, and believes it can maintain a sales growth rate of around 30% for the foreseeable future. It is also a very profitable business, generating free cash flow of $ 206 million in the past 12 months (a free cash flow profit margin of 29%).
Given that the cloud is expected to be a high growth industry over the next decade, Dynatrace will not run out of growth opportunities and generate large amounts of cash to self-finance its expansion. Stocks are trading for a premium 82 times over 12 months of free cash flow at the time of writing, but this is a premium worthy of the best monitoring and automation platform in the world. cloud application security.
Fortinet: data centers are a prime target for cybercrime
Although often labeled as a âlegacyâ cybersecurity software vendor, Fortinet’s story is more than it seems. The fact that stocks rose by more than 60% in the first half of 2021 (which makes Fortinet one of the best performing securities this year) is an indication of this.
The argument goes like this: With the global workforce more distributed than ever and millions of people now working remotely, firewalls (devices that monitor and filter network traffic in and out of a physical location like an office building) aren’t exactly growing the industry anymore. But this is not true.
While it is true that many organizations strive to protect employee devices, a trend that has been a boon to endpoint security specialists. CrowdStrike (NASDAQ: CRWD), remote workers are making liberal use of cloud-based systems like never before. And cloud apps are created and run by data centers, which are physical assets, even though most of us don’t see them.
A massive upgrade cycle for data centers is therefore only just beginning to support the growth of the cloud, and Fortinet’s firewalls and software services based on its hardware activity are the best options to keep these centers secure. critical computer units. Total sales grew 20% last year thanks to services, and sales accelerated at a rate of 23% in the first three months of 2021 as hardware revenue picked up. Free cash flow was $ 264 million in the first quarter, a whopping 37% profit margin.
Fortinet has an impeccable balance sheet ($ 3.09 billion in cash and investments, $ 987 million in long-term debt at the end of March), operates in a steadily growing segment of the health care industry. security and has a history of organically promoting expansion with new hardware and software cybersecurity offerings.
At 42 times 12-month free cash flow, it’s not the valuable security it was at the start of the year, but it’s barely overvalued given the opportunity that awaits it over the course of the year. of the next decade. It remains one of my best security buys.
Cloudflare: Protecting the Internet from bad actors
Cloud computing was a massive secular growth trend of the 2010s, and last year’s pandemic only reinforced that. But over the next decade, a new movement called edge computing – in which data and services from a large, centralized data center is moved to smaller, more localized data centers – could continue the trend. Cloudflare has become a leader in this burgeoning advanced computing market.
Cloudflare offers dozens of services designed to keep the Internet and web content secure. From its content delivery network (CDN) at the edge, from the security of its website and applications to protecting employee devices, Cloudflare has a solution for businesses of all sizes.
It has a single market strategy that has also worked wonders. It develops new services and often offers them free to individual users and small businesses, then offers a premium version of its software to larger businesses. As a result, the company has attracted millions of users around the world and is only just starting to move upmarket to larger paying subscribers.
The financial results of this model have been impressive. 2020 revenue increased 50% to $ 431 million, and the pace continued in the first quarter of 2021 with a 51% year-over-year increase to $ 138 million. Cloudflare is spending heavily to support its expansion, but it is starting to reach a profitable scale. Free cash flow was only minus $ 2.2 million in the first few months of the new year, compared to minus $ 30.6 million for the same period in 2020.
This small internet security company is just beginning its journey. After being crushed in the spring with other high-growth stocks, Cloudflare has once again returned to all-time highs and is trading for a premium of 66 times sales over 12 months. This is the result of new capabilities on its platform, including a partnership with NVIDIA (NASDAQ: NVDA) to bring AI to its edge network and new analytics software integrations with Microsoft, Splunk and Datadog.
If you haven’t purchased Cloudflare yet, take it easy and keep an initial purchase small (I usually start with less than 1% of my wallet). But the long-term potential of this business is enormous. Don’t let the high price keep you away for too long.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.