There’s no denying that the cybersecurity industry has a massive runway ahead of it. According to one estimate, the global cybersecurity market is projected to reach more than $367 billion by 2029, a compound annual growth rate (CAGR) of 13% from 2021.
With such a large opportunity, there are plenty of businesses trying to gain market share. Two of these companies, CrowdStrike (NASDAQ: CRWD) and Fortinet (NASDAQ: FTNT), are at the top of my list of stocks in this space to hold for the long term. Let’s dig in and see why.
1. CrowdStrike: Growing customers who are spending more
CrowdStrike most recently reported its fiscal 2023 first quarter (ending April 30) results, and they were impressive. Revenue increased 61% year over year to $488 million, and the company generated $158 million in free cash flow. CrowdStrike is consistently cash flow positive, which is important because it’s not yet profitable. That said, CrowdStrike took a big step toward profitability in Q1, posting a net loss of $31.5 million, compared to a loss of $85 million in the year-ago quarter.
The more interesting trends to watch for CrowdStrike are regarding its subscription customers and how much they spend. Q1 ended with 17,945 customers, up 57% year over year. As of the end of 2021, 65% of Fortune 100 companies and 51% of Fortune 500 companies were customers.
This growing customer base appears to be satisfied with the services it is receiving as evidenced by CrowdStrike’s dollar-based retention rate (a measure of how much more a customer spends compared to the previous year), which has exceeded the company’s 120% benchmark for the past 17 quarters.
Customers also demonstrate the value of CrowdStrike’s offerings by increasingly purchasing more modules (products). As of Q1, 71% of customers subscribe to four or more modules, 59% subscribe to five or more, 35% to six or more, and 19% to seven or more. These percentages have steadily increased over time.
Despite being down 11% year to date, CrowdStrike is a market beater in 2022, staying ahead of the S&P 500‘s 17% loss. CrowdStrike currently trades for a price-to-sales (P/S) multiple of 26. While not cheap, that is below its average P/S of 37 and considerably lower than the high of 66 reached in early 2021. CrowdStrike has always been an expensive stock, making today’s valuation a relative bargain.
2. Fortinet: Under the radar but posting impressive results
Fortinet may not be the first name that comes to mind when thinking about cybersecurity stocks, and that’s a shame because the company’s results are second to none.
In Fortinet’s Q1 of 2022, ending on April 30, revenue was up 34% and billings increased 36%. This represented the sixth straight quarter of revenue and billings growth in excess of 20%. Additionally, revenue growth was strong across Fortinet’s various geographies. Revenue in the Americas segment increased 32%, while the Europe, Middle East, and Africa (EMEA) segment grew 26% and Asia-Pacific (APAC) jumped 57%.
Fortinet is also signing larger deals with customers over time. Take a look at the increase in larger deals.
Number of Deals
Total deals $50,000 or more
Total deals $250,000 or more
Total deals $500,000 or more
Total deals $1 million or more
These larger-sized deals are coming from enterprise customers, who also have a need for higher-end products. In Q1, the percentage of high-end products sold was 38%, up from 32% in Q2 of 2021.
Fortinet is expecting the strong results seen over the past several quarters to continue. The company is guiding for year-over-year revenue growth of 27% in Q2 and 31% for fiscal 2022. Billings are expected to increase 30% in Q2 and 33% for the year.
Like CrowdStrike, Fortinet has been a market-beating investment year to date, outpacing the S&P 500 by 2%. The stock is on the expensive side, currently trading for a price-to-sales (P/S) ratio of 14, but this is down from its recent high of 20. The current stock price may not be as much of a discount to recent valuations, but the strong results and guidance make Fortinet worthy of its premium price tag.
Jeff Santoro has positions in CrowdStrike Holdings, Inc. and Fortinet. The Motley Fool has positions in and recommends CrowdStrike Holdings, Inc. and Fortinet. The Motley Fool has a disclosure policy.