The 2 best cybersecurity stocks are a smart buy for 2022

The need for modern cybersecurity protection has attracted a lot of attention during the pandemic. Many organizations have neglected upgrading their IT infrastructure for years. Newly remote workforces, a rapid migration to cloud computing, and technologically advanced villains have led to an increase in demand for cybersecurity software since 2020.

However, many high-growth cybersecurity stocks are trading for insanely high premiums and have fallen in recent times as the Federal Reserve expects the Federal Reserve to start raising interest rates this year (the High growth stocks can be very sensitive to changes in interest rates because higher rates decrease the value of future cash flows). But the companies that grow and very profitable could be ready for a big race in 2022. This is why often overlooked Palo Alto Networks (NASDAQ: PANW) and Fortinet (NASDAQ: FTNT) look like smart shopping right now.

Image source: Getty Images.

Palo Alto Networks: Largest Cybersecurity Company by Revenue

The darling of cloud-based security CrowdStrike Holdings (NASDAQ: CRWD) was the largest pure-play cybersecurity company by market cap in 2021, a title it recently lost after stocks fell sharply in recent months. But as measured by actual sales, Palo Alto Networks is by far the largest stand-alone security company, having generated nearly $ 4.6 billion in sales in the past 12 months.

Palo Alto’s software predates the cloud age, so it has spent a few billion dollars on nearly a dozen acquisitions over the past few years to keep up with the times. What has emerged is a leading software platform with thousands of more loyal customers and services than ever before. Palo Alto believes it can maintain an average 23% revenue growth rate over the next several years as it adapts to its clients’ needs for various security services. For its 2022 fiscal year, it forecasts a year-over-year increase of up to 26%.

During its period of increased expense to integrate all the acquisitions it made, Palo Alto’s profitability plummeted. However, that is starting to change. Free cash flow was $ 1.44 billion over the past 12 months, which equates to a healthy 32% free cash flow profit margin that the company expects to be able to maintain over the next 12 months. the year to come. The balance sheet is also in good shape, with $ 2.27 billion in cash and cash equivalents and an additional $ 2.09 billion in short- and long-term investments, offset by just $ 3.67 billion in debt (under form of low-interest debt that can eventually be converted into inventory).

Equities have mostly withstood the recent market meltdown in high growth but richly valued tech stocks. Palo Alto shares are trading near all-time highs as many smaller peers have fallen at double-digit percentages. Even so, at 35 times 12-month free cash flow, the largest cybersecurity company can be bought for relative value and is in great shape as it tries to capture more spending in the security sector in the world. over the next few years.

Fortinet: now the largest cybersecurity company by market capitalization

Like Palo Alto Networks, Fortinet is often viewed as a “legacy” cybersecurity company that predates the cloud computing era. However, it is not to be outdone. Although it lags behind Palo Alto in terms of revenue (it has generated over $ 3.1 billion in sales in the past 12 months), Fortinet has currently overtaken Palo Alto and CrowdStrike as the biggest Pure cybersecurity game as measured by market cap – even after falling roughly 15% from all-time highs of the past two months.

Chart showing the rise in market capitalizations of Palo Alto, Fortinet and CrowdStrike since April 2021.

Data by YCharts.

There is a good reason for this outperformance. Fortinet is a cash-generating machine, opting for a more conservative strategy of developing new products and technologies in-house rather than acquiring smaller peers. The result? Almost as much free cash flow generation last year ($ 1.25 billion) as Palo Alto, even though Fortinet reports more than $ 1 billion less in annualized sales. Fortinet’s free cash flow profit margin has reached a whopping 40% in the past 12 months.

Fortinet still looks like a fantastic investment. Although it has built a stable of software products that generate recurring revenue, the company is one of the best developers of chips that help protect data centers – the assets that make cloud computing possible in the first place. As more companies upgrade their IT equipment and migrate to cloud and hybrid operations, Fortinet will have a foot in the door with its hardware.

Fortinet expects sales for 2021 to be up around 29% year-on-year, a pace that could moderate by 2022. Nonetheless, with $ 1.85 billion of cash and cash equivalents and $ 1.53 billion in short- and long-term investments, offset by debt of just $ 1 billion, this is a superb cybersecurity company to invest in right now. Stocks trade 43 times over the past 12 months of free cash flow, a worthy premium considering this long-term winner’s track record of exceptional returns to shareholders.

10 stocks we prefer at Palo Alto Networks
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Nicholas Rossolillo and his clients own CrowdStrike Holdings, Inc., Fortinet and Palo Alto Networks. The Motley Fool owns and recommends CrowdStrike Holdings, Inc. and Palo Alto Networks. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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