In our ever-connected world, cybersecurity attacks are on the rise. According to a study by Check Point Research, cybersecurity breaches have risen 32% year over year and there are over 1,200 attacks each and every week globally. From the Colonial Pipeline breach to a recent “social engineering” hack at Uber (UBER, Financial), these attacks are embedded into every industry vertical.
For investors, cybersecurity stocks seem to be pretty immune to the recessionary environment as companies find the products essential for their protection. Therefore, this discussion will take a deeper look at two top cybersecurity companies.
CyberArk Software
CyberArk Software Ltd. (CYBR, Financial) is a cybersecurity company that is a Gartner Magic Quadrant leader in access management. In user access management and security, the company uses the concept of “zero trust,” which means people in the network are not trusted by default and only given access to what they need.
For example, imagine you work for the human resources department of a company and only use specific applications. With a zero trust architecture, you are only granted access to these applications. This may seem like common sense, but most IT networks are set up in the opposite way by default. Let’s say an employee has their password stolen. A hacker can then move laterally inside the network and also access financial applications and other databases with company secrets or customer details. CyberArk's software solves this problem with its platform, which allows executives to set up granular access control.
Secure financials
CyberArk Software generated solid financial results for the third quarter of 2022. Revenue of $153 million rose by a solid 26% year over year, surpassing management's own prior guidance. This was driven by exceptional subscription revenue growth of 110% to $74 million. CyberArk’s management is gradually transforming the business model to be subscription-based, which appears to be successful so far.
The company has increased its annual recurring revenue to $512 million, up 49% year over year. In addition, it has continued to capture larger customers with over $100,000 each in ARR. These high-ticket customers increased to 1,200 in the third quarter of 2022, up 50% year over year.
The company is facing profitability challenges as it reported a loss of 80 cents per share, which was worse than the loss of 73 cents reported in the prior-year quarter. This was driven by a larger (27%) increase in operating expenses, which was due to higher sales and marketing expenses. Management insists these extra costs are part of its transition to a subscription-based model, but investors should still keep an eye on this metric.
The good news is the business has a robust balance sheet with $950 million in cash and short-term investments. However, it also has $569 million in debt, which is mostly long-term debt.
Valuation
CyberArk trades at a price-sales ratio of 10, which indicates the stock is fairly valued relative to its historic average.
The GF Value Line also indicates an intrinsic value of $160 per share based on its historical ratios, past financial performance and analysts' future earnings projections. At its current price, the stock appears to be fairly valued.
Growth investor Catherine Wood (Trades, Portfolio) of Ark Invest purchased 17,393 shares of CyberArk during the third quarter. The stock traded at an average price of $143 per share during the quarter.
Fortinet
Fortinet Inc. (FTNT, Financial) is a global cybersecurity company that is a leader in firewalls. The goal of a firewall is to inspect and stop unwanted traffic from entering your network.
The company's firewalls made up 37% of global firewall shipments in 2021, beating its closest competitor Cisco (CSCO, Financial) by a strong margin as it only shipped 13% of the total. This is not a surprise given Fortinet is a Gartner Magic Quadrant leader in next-generation firewall solutions.
The company has also expanded its platform to an all-in-one “security fabric,” which covers multiple areas, from security posture and threat intelligence to zero trust and cloud security.
Cloud security is an interesting area given, according to a study by Flextera, many information technology decisionmakers are opting for a hybrid, multi-cloud approach to the digital transformation. This means organizations may be using Amazon Web Services, Microsoft Azure and Google Cloud, in addition to many cloud-based applications such as Salesforce. The need to secure all these areas is becoming vital. That is where Fortinet’s cloud security offering comes in. However, the company is facing stiff competition in this area from legacy companies such as Check Point (CHKP, Financial) and Palo Alto Networks (PANW, Financial).
Growing financials
Fortinet generated solid financial results in the third quarter. Revenue of $468.7 million increased 39% year over year, driven by growth in its core and enhanced products.
The company has focused on attacking the enterprise market and has increased its number of millionaire deals, which are deals worth over $1 million each, by 80% year over year to 153 deals.
The company also has a solid gross margin of over 76% and increased its gross profit by over 30% year over year to $876 million. The business has also expanded its operating income to $335 million, which has risen 45% year over year.
Overall, earnings per share of 29 cents surpassed analysts' expectations by 6 cents.
Fortinet has a robust balance sheet with cash and short-term investments of $1.80 billion. The company also has $989 million in debt, but this is manageable as it is mostly long-term debt.
Valuation
Fortinet trades at a price-sales ratio of 10. This suggests the stock is fairly valued relative to historic multiples.
The GF Value Line indicates a fair value of $60 per share. At current levels, the stock is modestly undervalued.
The world's largest hedge fund, Bridgewater Associates, which was founded by Ray Dalio (Trades, Portfolio), loaded up on shares in the third quarter. It purchased 91,548 shares, which traded at an average price of $54 each during the quarter.
Final thoughts
Fortinet and CyberArk are poised to benefit from the growth in the cybersecurity industry. Both stocks have had strong financial performances, beating earnings estimates. In addition, purchases by Wood and Dalio indicate they could be good opportunities.
