In early July, the largest ransomware attack ever shut down up to 1,500 businesses worldwide. At the same time, Russian hackers allegedly tried to infiltrate the Republican National Committee.
Ransomware attacks rose 150% in 2020, according to the cybersecurity company Group-IB, and the recent cyber attacks indicate the situation could worsen this year. President Joe Biden already signed an executive order in May in an effort to strengthen America’s cybersecurity defenses, but it could require billions of dollars in fresh spending to block these devastating attacks.
Last month, I highlighted CrowdStrike Holdings, Palo Alto Networks, and Cisco Systems as three promising plays that stand to benefit from this secular trend. Today, I’m adding three more cybersecurity stocks to that list: Cloudflare (NYSE:NET), Fortinet (NASDAQ:FTNT), and Check Point Software Technologies (NASDAQ:CHKP). Let’s find out a bit more about these three companies.
1. Cloudflare: The growth play in cybersecurity
Cloudflare provides content delivery, domain name server (DNS), and cybersecurity services that sit between a website’s visitor and its host. These services help a website deliver digital content, shield it from distributed denial-of-service (DDoS) attacks, and protect its visitors from malicious software.
Many internet users have likely run into Cloudflare’s defenses and been asked to prove that they’re humans instead of bots. Its platform serves data from 200 cities in over 100 countries worldwide and processes 25 million HTTP requests each second. Last October, Cloudflare’s co-founder and chief operating officer, Michelle Zatlyn, likened its secure network to a “water treatment filtration” system for the internet.
Cloudflare’s revenue rose 50% to $431 million last year, and it roughly halved its adjusted net loss from $70 million to $35 million. It ended the year with a dollar-based net retention rate of 119%, which means its existing customers spent 19% more money year over year.
This year, analysts expect Cloudflare’s revenue to rise 43% to $615 million with another narrower loss. Its stock isn’t cheap at 55 times this year’s sales, but the escalating cyberattacks indicate companies and organizations will require Cloudflare’s services for the foreseeable future.
2. Fortinet: The stalwart cybersecurity stock
Fortinet’s core product is a next-gen firewall called FortiGate, which is tethered to on-site security appliances through its Fortinet Security Fabric. This digital “fabric” provides end-to-end protection for on-premise, cloud-based, and Internet of Things (IoT) devices across a network.
The company serves more than half a million customers worldwide, including the majority of the Fortune 500, and uses its AI and machine learning systems to analyze over 100 billion events every day.
Fortinet’s revenue rose 20% to $2.59 billion last year. Its billings rose 19% to $3.09 billion while its deferred revenue — a key indicator of its future demand — rose 24% to $2.61 billion.
Its operating margin expanded, its adjusted EPS increased 34%, and it remained firmly profitable when using generally accepted accounting principles (GAAP). That stable profitability sets it apart from many other cybersecurity companies, which are unprofitable.
Fortinet expects its revenue to rise 19% to 21% this year, for its operating margin to remain stable, and for its adjusted earnings to grow another 9% to 13%. The stock also isn’t cheap at about 58 times forward earnings and 13 times this year’s sales — but its rock-solid growth rates could justify that premium.
3. Check Point Software: The value play
Check Point is an Israeli cybersecurity company that provides firewalls to more than 100,000 businesses and millions of users worldwide. Like many other older cybersecurity companies, Check Point has been expanding beyond its on-site appliances with cloud-based services. It’s also been offering more ways to shield manufacturing plants, utilities, and other mission-critical environments from IoT-based attacks.
Its revenue rose 4% to $2.07 billion in 2020, and its cloud business generated double-digit percentage growth throughout the year. Its adjusted EPS increased 11%, and it’s firmly profitable by GAAP measures.
Analysts expect Check Point’s revenue to rise 4% this year as its earnings stay nearly flat. That growth rate seems tepid compared to other cybersecurity stocks, but it trades at just 16 times forward earnings, which makes it a rare value stock in a frothy sector. Check Point has also repeatedly spent its free cash flow on buybacks, which reduced its outstanding shares by 34% over the past 10 years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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