Cybersecurity – the best picks to invest now

The cybersecurity sector appears to be a promising area for investment in 2024. In the first quarter of 2024, venture capital (VC) invested $2.7 billion into cybersecurity startups across 154 deals, highlighting significant activity in the sector. We highlight two companies which are attractive investments from the sector.

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Cybersecurity sector is poised for strong performance in 2024 and beyond?

The global cybersecurity industry is expected to reach $209 billion by the end of 2024, up from $191 billion in 2023. This represents a 10% growth.

According to Statista, the cybersecurity market in the United States is projected to grow by 9.79% from 2024 to 2028, resulting in a market volume of US$113.80 billion by 2028.

The cybersecurity market in Europe also experienced substantial growth in 2024. The market size was estimated at $56.96 billion for the year and is expected to reach $95.17 billion by 2029, growing at a CAGR of 10.81% (Mordor Intelligence). Additionally, the revenue in the European cybersecurity market was projected to reach $45.00 billion in 2024, with security services dominating the market (Statista). Furthermore, the Europe cybersecurity market is projected to exhibit a growth rate (CAGR) of 8.9% during the period from 2024 to 2032.

The main driving forces behind solid growth outlook for the sector are:

Increasing Demand: The demand for effective cybersecurity solutions has surged, driven by the growing threat landscape and the need to protect sensitive data and critical infrastructure.

Technological Advancements: Rapidly advancing technologies, such as cloud computing, IoT, and AI, create new attack vectors, necessitating robust cybersecurity measures.

Geopolitical Tensions: Geopolitical instability often leads to cyber threats, prompting organizations to invest in security solutions.

Skills Gap: The cyber skills shortage highlights the importance of cybersecurity investments and drives demand for specialized services and products.

Regulation and Compliance: Effective regulation encourages organizations to prioritize cybersecurity, benefiting the sector as a whole.

CrowdStrike – Pure Play on Cybersecurity Sector Growth

CrowdStrike (CRWD) is a global cybersecurity leader known for its advanced cloud-native platform designed to protect endpoints, cloud workloads, identities, and data. The company was founded in 2011 with the goal of reinventing security for the cloud era, providing solutions to meet the evolving nature of cybersecurity threats.

Financially, CrowdStrike has reported a strong performance for the fiscal year 2024, ended in January 31 2024.

• Revenue for the full-fiscal year 2024:?Total revenue was?$3.06 billion, a 36% increase, compared to?$2.24 billion?in fiscal 2023. Subscription revenue was?$2.87 billion, a 36% increase, compared to?$2.11 billion?in fiscal 2023.
• Subscription Gross Margin:?GAAP subscription gross margin was 78% in fiscal 2024, compared to 76% in fiscal 2023. Non-GAAP subscription gross margin was 80%, compared to 78% in fiscal 2023.
• Income/Loss from Operations for the full year 2024:?GAAP loss from operations was?$2.0 million, compared to a loss of?$190.1 million?in fiscal 2023. Non-GAAP income from operations was?$660.3 million, compared to?$355.6 million?in fiscal 2023.
• Net Income/Loss Attributable to?CrowdStrike:?GAAP net income attributable to?CrowdStrike?was?$89.3 million, compared to a loss of?$183.2 million?in fiscal 2023. GAAP net income per share attributable to?CrowdStrike, diluted, was?$0.37, compared to a loss of?$0.79?in fiscal 2023. Non-GAAP net income attributable to?CrowdStrike?was?$751.8 million, compared to?$368.4 million?in fiscal 2023. Non-GAAP net income attributable to?CrowdStrike?per share, diluted, was?$3.09, compared to?$1.54?in fiscal 2023.
• Cash Flow:?Net cash generated from operations was?$1,166.2 million, compared to?$941.0 million?in fiscal 2023. Free cash flow was?$938.2 million, compared to?$676.8 million?in fiscal 2023.

The company also provide financial outlook and guidance for the full year 2025. According to the management’s guidance, CRWD’s Non-GAAP income from operations should be in the range of $863.6-$913.0 million compared to $660.3 million, reported for the full year 2024. This represents impressive 30%-38.2% y-on-year growth.

In addition, the company assumes that its Free Cash Flow will increase by 30%-32% year-on-year in 2025 and the Free Cash Flow will margin would be in the range of 31%-33%. CrowdStrike has sufficient capital to invest in key expansion projects. Although CRWD’s management guided that CapEx would represent between 8% and 10% of the company’s revenue in 2025. At the same time, the interest expense will stay flat. According to this guidance, we foresee that CrowdStrike should significantly improve net operating income and the bottom line for common shareholders.

We expect such factors like rising cyberattacks, new security regulations and artificial intelligence will drive growth of CrowdStrike’s revenue and market share. According to company’s management, CrowdStrike currently holds?17.7%?of the total?$8.6 billion?modern endpoint security market, outpacing Microsoft’s 16.4%.

Given the provided guidance and our outlook and estimates for the global cybersecurity sector, we updated our valuation on CrowdStrike. CrowdStrike’s fair price comes at $405 per share, which implies attractive 18% upside potential for this year. We believe that CrowdStrike is very much suitable for long-term investment because we foresee good potential for further share price appreciation in the next three-years. For an attractive entry point we would recommend investors to watch a bit lower levels now, as the stock looks overbought at the moment. We would be buyers of CRWD around $320-$330 levels (if the share price hopefully corrects).

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Zscaler – play on growth cloud security and digital transformation

Zscaler (ZS) is a company that specializes in cloud security, offering enterprise cloud security services to a variety of sectors including airlines, transportation, consumer goods, retail, financial services, healthcare, manufacturing, media, and public sectors such as federal and government education. Zscaler is known for its cloud-native cybersecurity solutions, positioning itself as a leader in cybersecurity and zero-trust digital transformation. The company’s platform provides ransomware and threat protection, as well as cloud and mobile security, among other services.

Despite recent growth moderation, Zscaler remains a standout winner in the cybersecurity market and ranks among the largest pure plays for enterprise security software by revenue.

In February 29, 2024 Zscaler reported its financial results for Q2 2024 of the fiscal year 2024, ended on January 31, 2024.

• Revenue for Q2 2024:?$525.0 million, an increase of?35%?year-over-year.
• Income (loss) from operations:?GAAP loss from operations was?$45.5 million, or?9%?of revenue, compared to $65.2 million, or?17%?of revenue,?in the?second quarter of fiscal?2023. Non-GAAP income from operations was?$103.2 million, or?20%?of revenue, compared to $48.8 million, or?13%?of revenue,?in the?second quarter of fiscal?2023.
• Net income (loss):?GAAP net loss was?$28.5 million, compared to?$57.5 million?in the?second quarter of fiscal?2023. Non-GAAP net income was?$121.1 million, compared to $57.6 million?in the?second quarter of fiscal?2023.
• Net income (loss) per share:?GAAP net loss per share was?$0.19, compared to?$0.40?in the?second quarter of fiscal?2023.?Non-GAAP net income per share was $0.76, compared to $0.37 in the second quarter of fiscal 2023.
• Cash flows:?Cash provided by operations was?$142.1 million, or 27% of revenue, compared to $89.5 million, or 23% of revenue,?in the?second quarter of fiscal?2023. Free cash flow was $100.8 million, or?19%?of revenue, compared to $62.8 million, or 16% of revenue, in the?second?quarter of fiscal?2023.
• Deferred revenue:?$1,502.2 million as of January 31, 2024, an increase of 35% year-over-year.
• Cash, cash equivalents and short-term investments:?$2,459.8 million?as of?January 31, 2024, an increase of $359.6 million from July 31, 2023.

For Q3 2024 Zscaler expects the following:

• Revenue of?$534 million to?$536 million, implies growth range of 1.6%-2% qoq
• Non-GAAP income from operations of?$98 million to $100 million, implies a qoq decline in the range of 4.8%-5%.
• Non-GAAP net income per share of?approximately $0.64 to $0.65, assuming?approximately 161 million fully diluted shares outstanding

For the full fiscal year 2024 the company expects to reach:

• Revenue of?approximately $2.118 billion to $2.122 billion, implies yoy growth in the range of 30.9%-31.2%.
• Calculated billings of $2.55 billion to?$2.57?billion
• Non-GAAP income from operations of?$395 million to?$400 million
• Non-GAAP net income per share of?$2.73 to $2.77, assuming approximately 161 million fully diluted shares outstanding

Despite slowing growth pace in the company’s key financials, we believe that Zscaler will retain its leadership position in digital transformation business.

The global digital transformation market is showing significant growth in 2024. According to Grand View Research, the market size was estimated at USD 731.13 billion in 2022 and is expected to continue to expand. This growth trajectory indicates a substantial increase year over year, reflecting the rapid pace of digital adoption and transformation across industries.

Moreover, Markets and Markets report that the global Digital Transformation Market size was accounted for $695.5 billion in 2023 and is projected to achieve a market size of $3,144.9 billion, highlighting the scale of investment and development in this sector. LinkedIn articles also mention steady growth for the digital transformation market, with a CAGR of 23.6% according to a market report for 2024.

Zscaler should report its earnings results for the fiscal Q3 2024 on May 30, 2024.

Zscaler is expected to post earnings of $0.65 per share for the current quarter, representing a year-over-year change of +35.4%. Over the last 30 days, the Zacks Consensus Estimate has changed +1.9%.

The consensus earnings estimate of $2.73 for the current fiscal year indicates a year-over-year change of +52.5%. This estimate has changed +1.7% over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $3.23 indicates a change of +18.2% from what Zscaler is expected to report a year ago. Over the past month, the estimate has changed +0.3%.

During the past three-years Zscaler mainly reported positive earnings’ surprises, which, we believe, should happen again during the forthcoming earnings release. On a year-to-date basis Zscaler shares significantly underperformed the market and the share price dropped by 18.2%. In our view, the share price underperformance was based on ZS’s slowing growth in key financial fundamentals. However, we believe that currently ZS’s shares look attractive as entry point for an investment. As a leader in digital transformation business, Zscaler is positioned to benefit from demand and growth in the coming years.

According to our estimates, the company’s current guidance and forecast, Zscaler’s fair price comes at $255 per share, suggesting impressive 41% upside potential for the stock. We believe it could make sense to open some long exposure into Zscaler’s shares before the earnings release.

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