This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To be sure not to miss anything of Tom’s picks, subscribe to his mailing list here.
Cybersecurity threats continue to grow
Tuesday, ZoomCommunications (NASDAQ:ZM) revealed that a security researcher from Google’s Project Zero discovered four security vulnerabilities that could allow attackers to hack victims “just by sending them a message.”
Just last week, a study published by Pew Charitable Trusts found that hospital patients are increasingly at risk from ransomware attacks. And in April, US intelligence officials suggested that Russian hackers had successfully used a “windshield wiper” to destroy satellite communications stations before they invaded Ukraine.
These attacks will only get worse.
We have a “seemingly pathological need to connect everything to the internet,” former Cybersecurity and Infrastructure Security Agency director Chris Krebs bluntly said in a speech to Congress, calling the situation a “dumpster fire.” garbage”.
And he’s right.
Self-driving cars… smart grids… connected health devices… the range of targets is only expanding.
But there is good news:
American companies are learning to fight back.
And at the forefront are high-growth companies Benefit & Protection cybersecurity actions that we will examine today.
2 Top Cybersecurity Actions to “Set It and Forget It”
Okta (NASDAQ:OKTA)… Palo Alto Networks (NASDAQ:PANW)… DataDog (NASDAQ:DDOG)…
There is no shortage of cybersecurity actions to become… well… top dog.
But the markets are acting like we’ve already caught the bad guys. The top nine cybersecurity stocks have lost 40% of their value in the past six months; $145 billion disappeared from the market.
This has created a golden opportunity for long-term investors to jump in. Although the market cycle suggests several more months of declines, these ready-made companies are the type of growth stocks that the Benefit & Protection the trading system shows superior performance over time.
Although his name may sound strange, Zscaler (NASDAQ:SZ) business is anything but.
The cybersecurity company operates the Zscaler Zero Trust Exchange, a platform that allows previously unknown devices to access secure systems.
As the number of on-the-go devices has exploded, so have the headaches of securing a corporate network. When thousands of workers use their personal phones to access corporate servers, how can IT ensure that a breach doesn’t spread throughout the network?
This is where Zscaler comes in.
Using a “zero-trust architecture,” the enterprise system acts as an intelligent switchboard that quickly authorizes and denies access as needed. The system also distorts IP addresses, making it harder for would-be hackers to attack something they can’t “see”.
No security system is perfect, but Zscaler is one of the best in the business.
And it shows.
Tip the ZScales in our favor
From a product standpoint, Zscaler receives excellent corporate reviews. The company was named a “Leader” in Gartner’s Magic Quadrant and has the highest rating for “Ability to Execute” among its ten competitors.
“Zscaler Internet Access Platform is the only solution that gives us an attack potential-free surface,” observed a Gartner review. “It does an excellent job of filtering traffic and is particularly strong in terms of security.”
The quality of the product is also reflected in its financial statements.
Since 2019, customer retention rates have averaged 122% – a figure possible only by selling customers faster than they leave. Gross margins have remained strong and valuations are at their lowest since the Covid-19 pandemic.
This created an ideal convergence of factors. As mentioned in yesterday’s newsletter, ZScaler earns a solid “A” rating in its Benefit & Protection growth score, which gives investors a higher probability of investment success.
There are, however, a few drawbacks.
First, ZS’s marketing team isn’t particularly efficient. Costs have risen faster than revenues, suggesting that online criticism of its weak sales incentives is on point.
Second, the company still faces an uncertain competitive landscape. Bigger rivals like Cisco (NASDAQ:CSCO) and Palo Alto Networks have far greater resources if they choose to enter the “zero trust” market. The company’s concentrated ownership (and large market capitalization) makes it less attractive as a takeover target, even for tech giants like Microsoft (NASDAQ:MSFT).
Finally, there is the short-term timing. Today’s rising rate environment suggests that healthcare, energy and homebuilders are best tactical games for traders looking for immediate profits. Loss-making companies like ZS could fall further before rebounding.
Nevertheless, those looking for long-term profits might well buy Zscaler. The company’s large cash position – and an “A” growth rating – make it a business to keep in your back pocket. Initial Benefit & Protection the target price starts at $250.
Just behind is CrowdStrike (NASDAQ:CRWD), a leader in endpoint security.
The company is on the front line of defense against cybersecurity attacks. Its cloud-based Falcon system attempts to identify dangerous activity and defend endpoints against viruses, ransomware and malware.
And the bigger the company gets, the better it gets: As its name suggests, CrowdStrike relies on crowdsourced data to train its AI systems for impending threats.
In other words, CRWD has created more than an antivirus program ready to fend off attackers. They have created a system that proactively monitors anomalies and adapts to new dangers before they are encountered.
Crowdstrike also receives rave reviews from Gartner, particularly for the ease of implementation of its cloud-based software. Entire businesses can be created in less than a day, making it a compelling choice over slower competitors.
Oust the bad guys
The quality of CrowdStrike is reflected in its financial numbers. Retention rates remain above 120% and analysts expect growth to exceed 48% this year. From a price-to-sales perspective, CRWD stock is at its lowest since March 2020.
The company has also managed to control its costs. Operating expenses grew more slowly than revenue last year, pushing CRWD’s free cash flow up 50% to $440 million.
And best of all, the company is a game of “expanding and expanding,” as Morningstar analysts observe. Each additional subscription module sold by the company increases the raw margin, not just the operating margin. This means CrowdStrike could break even by 2025 and achieve EBIT margins of almost 20% two years later.
But like ZScaler, there are a few downsides to buying a stock like CrowdStrike today:
- Black Swan Events. First, there is a long-term risk of internal breach. While CrowdStrike is unlikely to go down, a successful attack could make cybersecurity’s poster child the next SolarWinds. Shares could hit $50 overnight.
- Lower upside down. CrowdStrike has fewer advantages than companies like ZScaler. Despite being down 53% since November, CRWD is still trading at 17 times the futures price over sales, making it one of the most expensive cybersecurity stocks. Investors pay a premium for quality.
- Market timing. CRWD is not immune to macro trends. The company can sell products to health and energy companies, but that’s not a counter-cyclical game.
Yet CrowdStrike is riding a massive wave of cybersecurity threats. Businesses have become aware of the risks of ransomware, and the high profile hacks have perversely become the industry’s best money-making advertising campaign. doesn’t to buy.
A big bet on the future
In 1988, Cornell graduate student Robert Morris wrote a computer program to identify the size of the Internet.
But a programming error caused “The Morris” to spread too quickly.
Within 15 hours, most of the Internet – about 15,000 computers – had been infected with the first online computer virus (talk about a bad day at work).
Since then, cybersecurity attacks have only gotten worse. In 2013, the CryptoLocker virus introduced half a million computers – and their hapless users – to the concept of ransomware. And spyware breaches like the 2020 SolarWinds hack have shown that even the most sensitive government data isn’t safe from prying eyes.
In 2021, Americans finally seemed to wake up to the threat when the Colonial Pipeline came under a massive ransomware attack. The six-day disruption was enough to wreak havoc on much of the East Coast’s gasoline supply.
But you think it was ominous…imagine what might happen next.
As more and more IoT devices are connected to the internet, the range of potential hacking targets will only grow. And while hacking your smart lights can be an annoyance, doing the same with a gas heater or moving vehicle could have far worse consequences.
Cybersecurity companies are fighting back. And as cybercriminals become increasingly sophisticated, these companies will quickly become the superstars of tomorrow’s high-stakes battles.
PS Do you want to know more about cryptocurrencies? Penny shares? Choice ? Drop me a note at firstname.lastname@example.org or connect with me on LinkedIn and let me know what you’d like to see.
As of the date of publication, Tom Yeung had (neither directly nor indirectly) any position in the securities mentioned in this article.
Tom Yeung, CFA, is a Registered Investment Advisor on a mission to simplify the world of investing.