Why Cloudflare, CrowdStrike and Zscaler are top cybersecurity stocks

Cybersecurity is seen to be an increasingly important investment theme, with the market set to continue expanding over the course of the decade. Key players like CrowdStrike, Zscaler and Cloudflare could stand to benefit in the longer term as businesses, governments and individuals seek to protect themselves against growing threats.

The events of the past couple of years — Covid-19, supply chain delays and war — have highlighted the importance of living and working in a secure world. Cybersecurity stocks like Cloudflare [NET], Crowdstrike [CRWD] and Zscaler [ZS] all have a key role to play in securing the future of enterprises, but investors need to be cautious.

Cybersecurity stocks ran up a lot during the Covid-19 bull market and, though they’ve fallen substantially from their dizzying highs, they remain overvalued relative to the broader technology sector. As of 8 June, Cloudflare has a forward price-to-earnings ratio of 2,000, according to Yahoo Finance. Crowdstrike and Zscaler have ratios of 125 and 138.89, respectively.

The industry has been caught up in the rout on technology stocks, with the WisdomTree Cybersecurity ETF [WCBR] down 25.4% in the year-to-date through 8 June. Nevertheless, Cloudflare, Crowdstrike and Zscaler, all three of which are held by the fund, are considered top plays on the investment theme.

Companies have had to deal with multiple new cybersecurity threats as hackers look to exploit vulnerabilities. Meanwhile, governments must ensure that critical infrastructure is protected, especially amid the increased threat of state-sponsored attacks. Grand View Research has forecast the global cybersecurity market to be worth $500.7bn by 2030, growing at a compound annual growth rate of 12%.

Cloudflare’s market could be worth $115bn

Since the conflict in Ukraine broke out, Cloudflare has onboarded a couple of dozen Ukrainian organisations to Project Galileo, which offers free cybersecurity protection to at-risk entities.

The company held an investor day in May, during which it announced a suite of new products that management believes will expand its total addressable market (TAM). Analysts reacted positively: Cowen’s Shaul Eyai argued that the company could potentially claim a TAM of $115bn and this would provide the launchpad a growth rate greater than 45% in years to come. 

Morgan Stanley’s Keith Weiss praised how newer solution categories were “driving consistent expansion of [net revenue retention], now at 127%, and supporting a 50-plus% revenue CAGR”.

Despite these positive developments, the Cloudflare share price has been hit by wider headwinds for tech stocks. The stock has cratered 58.1% year-to-date and closed on 8 June 10% above its 52-week low set on 24 May.

Analysts upgrade CrowdStrike in June

As one of the fastest growing cybersecurity stocks, CrowdStrike operates in what’s known as the endpoint protection platform business. Its software allows users to identify and deal with threats in real time. According to IDC, the company leads the endpoint security market in terms of revenue share.

CrowdStrike has enjoyed robust growth. In the 12 months to 31 January, subscription customers increased 65% year-over-year to 16,325. Annual recurring revenue (ARR) grew 65% to $1.73bn, of which $216.9m was new ARR.

Morgan Stanley upgraded its rating for the stock to overweight early in June, based on its “sustained market share [and] growing evidence of TAM expansion”.

In March, CrowdStrike cracked the Party Ticket ransomware being used to target Ukraine.

However, like Cloudflare, CrowdStrike has been impacted by broader issues for tech stocks as investors turn from growth to value. The CrowdStrike share price is down 12.6% year-to-date and closed on 8 June 30.4% above its 52-week low set on 12 May.

Zscaler has a ‘solid’ underlying business

The San Jose company delivered an earnings beat when it reported Q3 earnings in May. Revenue grew 63% year-over-year to $286.8m and billings were up 54% to $345.6m.

Wedbush’s Dan Ives reiterated an ‘outperform’ rating. He said that there should be a “continued acceleration of cybersecurity momentum for [Zscaler] for the remainder of 2022 and beyond”.

Citi analyst Fatima Boolani described the underlying business as “solid”. She added that, should the company face any macroeconomic headwinds in the near future, then it should be in a good position to weather them as 80% of revenue over the next 12 months is “in the bag”.

Zscaler announced a partnership with Siemens [SIE.ETR] at the end of May that will see it support the German manufacturer to secure factory production output by securing their networks. Supply chains have come under an increasing number of attacks since the pandemic began.

The Zscaler share price is down 48.4% year-to-date and closed on 8 June 32.3% above its 52-week low set on 18 May.