War in Ukraine increased demand for cybersecurity stocks

Demand for cybersecurity stocks has increased twice in the last two years. The first time this happened was during the coronavirus pandemic. Many companies were forced to send their employees home to work, which increased the demand for cybersecurity products as remote workers accessed company data (which needed to be protected) over the Internet. For this purpose, many companies created virtual private networks or VPN services, while others bought laptops with preinstalled security software. In this regard, there is a new term – SASE, which denotes an IT model that combines the functionality of network services and security services. In other words, it is the technology of secure border access.

After a prolonged rise in 2020 and part of 2021, cybersecurity stocks have had a tough time in recent months amid a decline in technology sector securities, the reason for which was the Federal Reserve’s plans to begin tightening monetary policy. The demand for them increased before the beginning of Russia’s war with Ukraine when hackers attacked the websites of the Ukrainian government as well as several Russian financial institutions.

The global spending on cybersecurity exceeded $150 billion in 2021. With recent developments, it will continue to grow in 2022. Given the urgency of the topic, we decided to provide some stock recommendations for companies in this area.

CrowdStrike – first among equals

One of the representatives from the cybersecurity field is CrowdStrike (CRWD). The company provides services to protect services and endpoints. The company’s platform is autonomous, powered by artificial intelligence, which makes security operations less complicated for customers.

Another plus of the platform is its cloud-based architecture, which allows it to collect huge amounts of data from its ecosystem of secure endpoints (devices). Every day the platform’s artificial intelligence processes about 1 trillion signals, preventing attacks, and learns in parallel. As a result, CrowdStrike is at the forefront of cyber threats and easily repels cyber-attacks of the latest generation.

Nearly half of the Fortune 100 companies are CrowdStrike clients. CrowdStrike is growing rapidly. In 2021, the number of clients grew by 75% to 14,687, and revenue increased by 69% to $1.3 billion. Last year, the issuer generated free cash flow (FCF) of $411 million, 67% more than in 2020. In 2021, the issuer’s market share increased by 4% to 14.2%.

The good news is that the company’s addressable market will grow, which means that it won’t reach its limit for a long time. Now CrowdStrike estimates the market potential at $55 billion, and by 2025, this figure will more than double to reach $116 billion. That said, the company has already achieved long-term adjusted gross margins from its services, despite being at the beginning of its growth.

C3.ai: when artificial intelligence never sleeps

The next candidate to consider is C3.ai (AI), which develops algorithms for implementing artificial intelligence in enterprises of extraordinary scale and complexity.

The company’s solutions help streamline operations, improve employee security and even detect money laundering and illegal transactions.

Its customers include such well-known companies as AstraZeneca, Baker Hughes, Shell, and the U.S. Air Force.

The issuer’s revenue in 2020 increased by 71%, which is not surprising given the transition of many companies to remote work. In 2021, revenue growth slowed, plus only 17% to $183 million.

Even though the net profit and free cash flow of the issuer are small, its balance sheet is strong enough, which allows the company to compensate for losses.

The issuer’s stock is down more than 80% in 2021 as investors worry about slowing growth, rising losses, problems adding to its customer base, and high valuations for the company after its IPO.

For the first two quarters of fiscal 2022, C3.ai generated revenue of $111 million. Free cash flow was -$20 million. And C3.ai has $1 billion in cash and investments.

According to the company, revenue in 2022 should improve and show growth of 35-36% as the obstacles to C3.ai’s growth are removed.

The company will remain loss-making in the coming quarters, but its growth will stabilize. Plus, C3.ai has room to grow, given that the addressable market will reach $271 billion by 2024. This paper is still speculative, but it looks very attractive given its upside potential.

Fortinet Inc. on guard of information security

Fortinet Inc. (FTNT) focuses on information security solutions. The company’s technology protects against digital attacks through its integrated Fortinet Security Fabric platform, which provides automated protection, detection, and response.

The issuer provides protection in the cloud (solutions can be used with major cloud providers such as Amazon Web Services, Microsoft Azure, Google Cloud, Oracle Cloud), endpoint protection, and the Internet of Things. Fortinet solutions can be used for network security and infrastructure security.

Over the last year, this paper has grown by more than 75%. In February 2022, the issuer released its report for Q4 2021 and the entire fiscal year. Fortinet’s revenue for the quarter was $963.6 million, up 29 percent from the same period in 2020. For the year, revenue exceeded $3.34 billion, which is also a 29% increase over last year. Note that 2021 was the third consecutive year in which the company showed revenue growth of 20% or more.

Free cash flow for the year reached a new record of $1.2 billion due to growing demand for the company’s solutions.

In early 2022, the company announced a new firewall, the FortiGate 3000F, which is based on its NP7 and CP9 security processors. The new firewall is designed to support organizations in creating hybrid IT architectures that accelerate digital innovation and drive business growth. The FortiGate 3000F also offers the highest performance ratings in the industry. Computing security ratings are six times higher per second than competitors’ offerings.

The company predicts revenue will reach $4.3 billion in 2022, a year-over-year increase of about 29 percent.

Fortinet is currently trading at a P/S multiple of just under 15, which is higher than historical averages. But the company’s recent results deserve a higher valuation, and the stock is likely to continue to outperform the market, which is good for long-term investors.

Qualys – a cloud platform for cybersecurity

Like Fortinet, Qualys (QLYS) has a cloud-based cybersecurity platform. The company also has the industry’s largest database of vulnerability signatures. Qualys solutions help its customers optimize and automate their security organization, giving it flexibility with significant cost savings.

The issuer partners with leading cloud service providers, such as Amazon Web Services, Microsoft Azure, and Google Cloud Platform.

Qualys solutions enable customers to collect and analyze large volumes of data. Qualys software will detect and prioritize vulnerabilities and then recommend mitigation and remediation measures.

Qualys currently has approximately 19,000 customers (65% of the Forbes Global 50, 45% of the Global 500, and 24% of the Global 2000) located in more than 120 countries.

Cybersecurity technology is constantly evolving, and Qualys keeps up with all the changes. For example, the company recently introduced the latest Context XDR solution. The new product includes extensive threat detection and remediation capabilities, providing data tracking at the network, cloud, endpoint, and application levels.

In February 2022, the issuer reported financial results for the fourth quarter and full fiscal year 2021. Qualys reported a 16% year-over-year revenue growth of $109.8 million and GAAP net income of more than $21.8 million, or $0.55 per diluted share. The issuer also looks attractive in terms of sales growth. Qualys sales are projected to increase 12.8% in 2022, compared to the industry average of 12%.

Microsoft and Google are also in play

Realizing the promise of the cybersecurity business, Microsoft (MSFT) has also embraced it. Microsoft recently reported that its cybersecurity revenues exceed $10 billion a year. Over 400,000 customers use Microsoft’s cybersecurity services. What’s more, the customer base is growing 40% each year.

In July 2021, Microsoft acquired RiskIQ, phishing, fraud, and malware protection company. The purchase cost Microsoft about $500 million, according to Bloomberg. That same summer, Microsoft acquired CloudKnox Security, a leader in cloud infrastructure access rights management.

Moreover, Microsoft has incorporated several security tools into its Office 365 cloud software. And now, while promoting its cloud services, Microsoft is also promoting cybersecurity services, which could squeeze players like Okta, CrowdStrike, and Splunk out of the market.

In March 2022, Google announced its intention to acquire Mandiant, a cybersecurity company. If the deal is approved by regulators, Mandiant would be the acquisition that would strengthen the company’s cloud offering and help close the gap with the leaders.

Alphabet (GOOGL) Google is also in this race. In early 2022, Google acquired the Israeli startup Siemplify, which provides security management, automation, and response solutions. Siemplify’s solutions will have to be integrated into Chronicle.

Cybersecurity companies that are preparing for an IPO

Darktrace (DARK), a developer of AI algorithms for cybersecurity, had a successful IPO in April 2021, and SentinelOne (S), a cybersecurity software company that has been called a major competitor to CrowdStrike, had a successful listing in the summer of 2021.

Netskope, Illumio, and Menlo Security are among the companies that are preparing to go public and that may be of interest to investors.

In June, Netskope raised $300 million and was valued at $7.5 billion. Illumio recently raised $225 million and was valued at $2.75 billion.

In our opinion, this direction for investment has not yet been fully disclosed. This market is more than promising, given the speed of introduction of new technologies into our daily lives. Many of the companies described today may seem expensive, but they are unlikely to show a significant decline and will only strive for new heights.


About author

Arseny Kudrin

Publicist, trader

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