The cybersecurity industry has a $2 trillion market opportunity. As the record number of ransomware attacks showed last year, threats are rising, and businesses need to bolster their defenses. In such a backdrop, cybersecurity stocks are a top industry to invest in.
Several tailwinds underpin spending on cyber defense. First, rising threat levels make cybersecurity a priority for organizations. Otherwise, neglecting this area might lead to financial losses and a tarnished brand in case of a breach.
Secondly, although artificial intelligence (AI) has been mainly a positive force, it has some defects. One major problem is that hackers are using AI to create sophisticated malware. Therefore, organizations must equally be vigilant and invest in the best threat detection tools from the top cybersecurity companies.
Lastly, the latest disclosure rules by the Securities and Exchange Commission require companies to disclose attacks. Per the rules, companies have to inform investors of any security breaches within four days. Disclosures that paint the company in a bad light can lead to a loss of confidence by customers and investors.
Considering these factors, organizations have recognized the urgency of their cyber defense needs. These three cybersecurity stocks are at the forefront of this effort with their cutting-edge solutions.
After underperformance in 2023, Fortinet (NASDAQ:FTNT) has a chance to rebound in 2024. Closing the valuation gap with Palo Alto Networks (NASDAQ:PANW) could provide substantial upside. As of this writing, on a trailing price-to-sales multiple, it trades at 9 times compared to Palo Alto’s 16.
Fortunately, the fundamental factors that caused the underperformance are on the mend. The firewall market experienced a slowdown in 2023 after several years of a pull forward in demand. As a result, product revenue declined 0.6% year-over-year (YoY) in the third quarter of 2023 to $465.9 million from $468.7 million in the prior year.
According to Bank of America (NYSE:BAC), firewall headwinds are transitory. It expects the firewall segment will resume growth in the second half of 2024 as new products gain traction. Fortinet firewall sales lead the sales of the broader platform. Thus, a reacceleration will boost the entire business. In line with a potential growth resumption, it’s one of Bank of America’s top cybersecurity stocks for 2024.
In terms of profitability, management is still focused on maintaining best-in-industry margins. CEO Ken Xie reiterated these profit goals in the Q3 2023 earnings call. “We remain committed to generating [a] healthy operating margin of 25% or greater in 2024 and 2025,” he noted.
Fortinet was recognized as a leader in the Gartner Magic Quadrant in security markets like SD-WAN, network firewall and SASE. The stock will rocket higher as growth accelerates in the second half of 2024.
Palo Alto Networks (PANW)
Palo Alto Networks is one of the best cybersecurity stocks to buy due to its growth and profitability profile. Last year, the company scored a huge win after being included in the S&P 500. Increased institutional interest will likely support higher stock prices.
This cybersecurity giant participates in four out of five of the largest cybersecurity segments. It’s a major player in firewalls, security operation center management, endpoint protection and cloud security. Today, the company is seeing soaring demand for its next-generation security portfolio, which includes Cortex XDR and XSIAM.
According to MITRE, Cortex XDR, Palo Alto’s security operations (SecOps) product, is the only solution that achieves 100% protection and detection. Due to this advantage, Cortex customers grew 25% YoY to over 5,300 in Q1 fiscal year 2024.
XSIAM is another leading product redefining customer security operations in the AI era. Since its launch in Q1 FY2023, it has had over $200 million in bookings, with annual contracting values averaging over $1 million. Notably, as of the end of Q1 FY2024, over $1 billion of deals were in the pipeline.
The next-generation security portfolio is enjoying tremendous demand. Annual recurring revenue for the segment has grown by over 50% YoY over the last five quarters. In the latest quarter, ARR hit $3.2 billion, increasing 53% YoY.
Finally, profits are expanding with non-GAAP operating margin growing from 21% in Q1 FY2023 to 28% in Q1 FY2024. As a result, operating income increased from $322 million to $529 million. With a best-in-class next-generation portfolio and surging profitability, PANW stock is the perfect defense for your portfolio.
One of my favorite cybersecurity stocks for 2024 is Zscaler (NASDAQ:ZS). Notably, it has several catalysts for 2024 that will drive further upside.
First, since it is a major provider to federal agencies, it will benefit from the Federal zero-trust strategy. Biden’s administration issued an order requiring federal agencies to meet specific zero-trust objectives by 2024. Zscaler will see an uplift in revenues as these agencies implement zero-trust architectures.
Secondly, the company has a robust pipeline of products that will drive revenue growth from now on. Innovations like Branch Connector and Risk360 present more revenue opportunities. These new products are already gaining momentum. For instance, Branch Connector, a plug-and-play software that eliminates the need for firewalls, is seeing tremendous demand.
Thirdly, there is an opportunity for growth in existing products, Zscaler Private Access (ZPA) and Zscaler Digital Experience (ZDX). Although most large customers have adopted Zscaler Internet Access, less than 60% and 10% use ZPA and ZDX, respectively. According to management, about 50% of new logo growth in Q1 FY2024 came from bundling the three. Through the “Zscaler for Users” bundle, adoption of ZPA and ZDX will increase.
Lastly, management sees a huge opportunity in artificial intelligence and machine learning applications. In June 2022, it launched AI/ML capabilities and recently unveiled AI-powered analytics for customers. Its AI-driven features included in ZS Advanced Plus bundles are priced higher than normal bundles.
All the opportunities mentioned above make Zscaler one of the top cybersecurity stocks to buy today. After 48% revenue growth in FY2023, FY2024 is off to a great start, with Q1 FY2024 revenues increasing 40% YoY. Considering the revenue growth, Wall Street analysts are bullish and ZS stock has 25 Strong Buy ratings.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.