The ongoing digital transformation of the global economy has created huge wealth for investors as a defining theme in stock markets. As technology plays an ever-increasing role in our daily lives, cybersecurity is more important than ever due to the rise in digital threats targeting individuals and organizations.
Companies that provide innovative solutions for protecting online networks and sensitive information will benefit from significant growth opportunities for the foreseeable future.
Here are two of the best cybersecurity stocks to add to your portfolio.
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1. Palo Alto Networks
Palo Alto Networks (PANW -0.88%) is recognized as a pioneer in cybersecurity and was the industry’s first pure-play company to reach the $100 billion market capitalization milestone late last year. Its status as the world’s largest security company represents a significant competitive advantage through its brand recognition and market influence, highlighting a key part of the stock’s attractiveness as an investment opportunity.
Palo Alto has achieved success by introducing several disruptive innovations while building a comprehensive cybersecurity platform that covers network security, endpoint security, and cloud security. Over the past five years, the stock has returned 394%, capturing a wave of strong growth and accelerating profitability.
In its last reported fiscal fourth quarter (period ended June 30), Palo Alto Networks reported a 12% year-over-year increase in revenue and a 5% increase in earnings per share (EPS). I did. Even more impressive was the momentum in annual recurring revenue (ARR) for next-generation security products, which grew 43% year-over-year, signaling a leap forward into 2025 and beyond.
The company believes that the ARR of next-generation security, including zero trust solutions, could triple by 2030. Management cited strong demand for recent subscription-based product launches that incorporate artificial intelligence (AI) tools as a strategic focus for the company.
From a valuation perspective, the stock trades at a consensus forward price-earnings ratio of 53 times year-ago EPS. This multiple may seem expensive, but given the company’s leadership and positive outlook, the premium is justified. Expectations that Palo Alto Networks will strengthen its market share and deliver high returns will likely keep the stock price trending higher over the long term.
2. Fortinet
Fortinet (FTNT 0.31%) is another cybersecurity leader that competes with Palo Alto Networks in several categories, but there are significant differences in technology approaches. In this case, the company stands out for its focus on protecting networks from threats such as unwanted access and hacker intrusion through a combination of specialized hardware products and proprietary software.
While cloud-based protection can represent a viable cost-effective solution with scale benefits for many applications, firewall appliances with integrated security features still play a critical role in secure networking. I am fulfilling my role. Fortinet’s FortiGate firewalls command more than 50% of the global market share as the foundation of the company’s wide range of operating systems.
In fact, Fortinet stands to benefit from the rise of AI and related data center infrastructure. The company expects the secure networking market to drive its business, growing at an average annual rate of 15% through 2028. Fortinet is also betting big on its AI capabilities, incorporating machine learning and automation for optimized threat detection and security monitoring.
In the near term, Fortinet is targeting full-year revenue growth of more than 10% starting in 2023, and its EPS target of approximately $2.02 represents a 25% increase over last year. Even though the stock has increased 31% over the past year and is currently trading near all-time highs, I believe the rally could continue. Compared to Palo Alto Networks, Fortinet’s stock has a lower forward P/E ratio of 33x, which makes me think it’s the most valuable stock of the two.
The big picture for investors
Long-term tailwinds make cybersecurity one of the most exciting areas in the technology sector, with the potential to benefit shareholders over the next decade. I believe both Palo Alto Networks and Fortinet deserve buy ratings and are good choices that capture the high-level themes driving the cybersecurity market.
Dan Victor has no position in any stocks mentioned. The Motley Fool has a position in Fortinet and Palo Alto Networks and recommends Fortinet and Palo Alto Networks. The Motley Fool has a disclosure policy.
