Cybersecurity stocks are often considered great long-term investments for two simple reasons. First, the number of cyberattacks will continue to rise as more people, data, and devices are connected to the internet. Second, responsible companies generally won’t turn off their digital defenses just to save a few dollars.
These companies aren’t completely immune to macro headwinds, but they’re still reliable stocks to buy and hold for the next decade. I believe the following three stocks are smart recommendations for any long-term investor: Palo Alto Networks (PANW 2.18%), CrowdStrike (CRWD 1.38%), and Zscaler (ZS 0.69%).
1. Palo Alto Networks
Palo Alto Networks is one of the world’s largest cybersecurity companies. It operates three main ecosystems: Strata, which houses its next-gen firewall and on-site network security products; Prisma, which handles its cloud-based security services; and Cortex, its platform of AI-powered threat-detection services.
Its total number of enterprise customers grew from about 9,000 at the end of fiscal 2012 (which ended in July 2012) to more than 80,000 today. Its annual revenue increased at a compound annual growth rate (CAGR) of 33% from fiscal 2013 to 2023, and its stock soared about 1,490% over the past 10 years.
Palo Alto’s growth slowed down over the past year as macro headwinds made it more challenging to sign on new customers. But it also became profitable on a generally accepted accounting principles (GAAP) basis over the past six quarters after it cut costs and reined in its stock-based compensation. A growing mix of higher-margin software, led by Prisma and Cortex (collectively known as its “next-gen security” services), also reduced its dependence on its lower-margin hardware.
From fiscal 2023 to 2026, analysts expect Palo Alto’s revenue to continue rising at a CAGR of 18% as its GAAP net income climbs at a CAGR of 51%. It might not seem like a screaming bargain at 48 times its forward adjusted earnings, but its scale, diversification, and rising profits all justify that higher valuation.
CrowdStrike doesn’t install any on-site appliances like Palo Alto. Its Falcon platform only provides cloud-native services that are easier to scale as an organization expands. That approach enables it to lock customers into stickier cloud-based subscriptions and continuously update its services without any on-site maintenance.
The company’s disruptive approach enabled it to more than quadruple its total number of subscription customers from 5,431 at the end of fiscal 2020 (which ended in January 2020) to 23,019 at the end of fiscal 2023. Its revenue increased at a CAGR of 67% during those three years, and its stock has skyrocketed more than 500% since its IPO in June 2019.
Like Palo Alto, CrowdStrike faces a near-term slowdown in this challenging macro environment. However, it squeezed out GAAP profits over the past two quarters and its non-GAAP profits continue to rise. From fiscal 2023 to 2026, analysts expect its revenue to grow at a CAGR of 30% as it stays profitable on a GAAP basis.
CrowdStrike’s also been driving its existing customers to adopt more of its cloud-based modules. In its latest quarter, 41% of its subscription customers had adopted at least six of its modules, compared to just 36% in the prior-year period. Its integration of new AI features into those modules could further increase the stickiness of its ecosystem.
The stock isn’t cheap at 57 times forward earnings, but its early-mover advantage in the cloud-native cybersecurity space and rapid growth rates support its premium valuation.
Zscaler is another cloud-native cybersecurity company like CrowdStrike. But unlike CrowdStrike, which provides a wide range of network security services, Zscaler mainly provides “zero-trust” tools that treat everyone as a potential threat. That niche is growing rapidly. From fiscal 2018 to 2023, the company’s annual revenue increased at a CAGR of 53%, and its stock has surged more than 1,060% since its IPO in March 2018.
The company isn’t profitable on a GAAP basis yet, but its adjusted operating margins have expanded over the past year as it aggressively reined in its spending. Macro headwinds are currently throttling its growth, but analysts still expect its revenue to rise at a CAGR of 26% from fiscal 2023 to 2026.
Zscaler already serves more than 7,500 customers worldwide, including about 30% of the Forbes Global 2000. That established market presence should help it keep pace with the broader global zero-trust market, which Precedence Research estimates will expand at a CAGR of 17% from 2023 to 2032.
At 84 times forward earnings, Zscaler looks a lot pricier than Palo Alto or CrowdStrike. But over the long run, it could still have plenty of room to grow as more organizations tighten up their internal security measures.
Leo Sun has positions in CrowdStrike and Palo Alto Networks. The Motley Fool has positions in and recommends CrowdStrike, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure policy.