Pro Research of the Week: Cybersecurity Stocks Poised to Ride AI Wave in H2
2023.07.07 05:37
- Cybersecurity stocks have been on a roll in recent months
- H2 2023 could see cybersecurity shares continue their rise
- With the help of InvestingPro, we’re going to try and find the best stock in the sector
- InvestingPro’s summer sale is back: Discover our massive discounts on subscription plans!
Cybersecurity stocks took the spotlight during the COVID-19 pandemic in 2020 and 2021 before undergoing a significant correction in 2022. But recently, stocks in the sector have started showing signs of recovery after a slow start to 2023.
The First Trust NASDAQ Cybersecurity ETF (NASDAQ:), which is one of the leading ETFs focusing on cybersecurity, has seen an impressive gain of nearly 17% since May.
But let’s not get ahead of ourselves. Before we dive into finding the best cybersecurity stock to invest in for the rest of 2023 and beyond, let’s take a moment to understand why cybersecurity stocks are an attractive investment option right now.
To do this, we’ll use InvestingPro financial analysis platform to compare the sector’s leading stocks.
Why Consider Buying Cybersecurity Stocks?
The cybersecurity sector has experienced rapid growth in recent years due to the increasing frequency and sophistication of cyber threats. This trend has prompted significant investments in cybersecurity as governments, businesses, and individuals strive to protect themselves against potential cyberattacks.
Additionally, the sector is grappling with a shortage of skilled professionals, which has resulted in an increased demand for external solutions and the automation of IT security processes. The utilization of AI, including chatGPT, further contributes to the effectiveness of cybersecurity measures.
According to analysts at Morgan Stanley, the use of generative AI has accelerated the creation and mutation of malware, placing a heavier burden on security organizations and highlighting the necessity of automation in the industry.
Generative AI not only enhances the productivity of cybersecurity solutions by automating routine tasks such as data reporting and alert summarization, but it also allows cybersecurity analysts to focus on addressing critical security issues.
It’s worth noting that cybersecurity companies tend to be resilient to macroeconomic challenges since their customers are unlikely to cut back on security spending even during tough times. While market leaders may face challenges in acquiring new customers during economic downturns, they are positioned for long-term growth as cyber-attacks become increasingly costly and devastating.
Best Cybersecurity Stock to Buy
Now, let’s turn our attention to finding the best cybersecurity stock. We have compiled an InvestingPro Advanced Watchlist, which includes the leading specialist companies in the sector:
These include:
Crowdstrike Holdings (NASDAQ:), Fortinet (NASDAQ:), Palo Alto Networks (NASDAQ:), Zscaler (NASDAQ:), Cloudflare (NYSE:), SentinelOne (NYSE:), Check Point Software Technologies (NASDAQ:) and Okta (NASDAQ:).
Source: InvestingPro
After carefully analyzing the list of cybersecurity stocks, we narrowed it down through a process of elimination. The first company we eliminated was Okta due to its lower overall financial health label and high leverage. We then removed Palo Alto Networks from consideration as it is currently overvalued with a high price-to-earnings ratio (PER) of 360.
This leaves us with two remaining stocks: Checkpoint Software and Fortinet. Among these, Fortinet stands out with strong revenue growth forecasts and an excellent overall financial health score. With a market capitalization of over $58 billion, it is also one of the largest cybersecurity stocks, which is a positive factor for long-term, risk-mitigating investments.
Fortinet Stock’s Recent Performance
Established in 2000, Fortinet is a global leader in cybersecurity and network solutions for enterprises and governments. In 2022, the company achieved a remarkable 32% year-on-year increase in revenues, primarily driven by its market-leading firewall platform.
Fortinet’s shares have seen an impressive year-to-date gain of 70% in 2023, reaching an all-time high of $76.27 on June 30. The momentum remains positive as we head into the year’s second half.
From a commercial standpoint, Fortinet has a strong track record of growth, with subscriptions surging from around 5,400 three years ago to over 23,000 presently. These subscriptions generate recurring billings, generating steady and reliable cash flow.
An update on Fortinet’s key financial metrics
Let’s also highlight some of Fortinet’s key financial metrics. As depicted in the image below from InvestingPro, the company has experienced significant quarterly revenue growth, more than doubling over the past three years.
Fortinet Revenue Growth
Source: InvestingPro
EBITDA also shows a largely positive long-term trend:
Fortinet EBITDA
Source: InvestingPro
With regard to the latest , published on May 4, Fortinet significantly exceeded expectations, with EPS 18.9% above consensus and revenue 5.3% above analysts’ forecasts.
Fortinet Earnings
Source: InvestingPro
The next earnings are due on August 2. Consensus forecasts indicate EPS will come in identical to the previous quarter, at $0.34, and revenue could move up slightly quarter-on-quarter to $1.301 billion.
Fortinet Earnings Forecasts
Source: InvestingPro
Indeed, it is worth considering that Fortinet has a history of surpassing expectations based on the available historical data on InvestingPro. This suggests that there is a likelihood of a positive surprise in their upcoming quarterly results.
Investing in cybersecurity stocks is a logical choice at a time when AI advancements are increasing cyber-attack risks, especially with the effectiveness of technologies like ChatGPT in the development of malware.
Among the cybersecurity stocks, Fortinet stands out as an excellent option for long-term investment. As one of the major players in the sector, Fortinet demonstrates solid revenue growth and operates on a subscription-based model that fosters stability through recurring income.
Conclusion
Considering Fortinet’s strengths, it appears to be an ideal choice for investors seeking long-term exposure to the cybersecurity industry. However, it is essential to conduct thorough research, monitor market conditions, and consult with a financial advisor before making any investment decisions.
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Disclaimer: This article has been written for information purposes only; it does not constitute a solicitation, offer, opinion, advice or investment recommendation and is not intended to encourage the purchase of assets in any way.
