The necessity for contemporary cybersecurity safety has attracted a whole lot of consideration in the course of the pandemic. Many organizations had been neglecting upgrading their IT infrastructure for years. Newly distant workforces, a fast migration to cloud-based computing, and technologically superior dangerous guys have resulted in cybersecurity software program demand hovering since 2020.

Nevertheless, many high-growth cybersecurity shares commerce for extremely excessive premiums and have been falling recently given the expectation the Federal Reserve will begin elevating rates of interest this 12 months (high-growth shares will be very delicate to adjustments in rates of interest, since increased charges decrease the worth of future money flows). However firms which are rising and extremely worthwhile might be poised for an ideal run in 2022. That is why oft-overlooked Palo Alto Networks (NASDAQ:PANW) and Fortinet (NASDAQ:FTNT) appear like good buys proper now.

Person in a home office using a smartphone and laptop.

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Palo Alto Networks: The biggest cybersecurity agency by income

Cloud-based safety darling CrowdStrike Holdings (NASDAQ:CRWD) was the biggest cybersecurity pure-play firm by market cap in 2021, a title it has lately misplaced after shares have fallen sharply in latest months. However as measured by precise gross sales, Palo Alto Networks is way and away the biggest stand-alone safety enterprise, having generated almost $4.6 billion in gross sales during the last 12-month stretch.  

Palo Alto’s software program predates the cloud period, so it spent just a few billion {dollars} on almost a dozen acquisitions the previous few years to get itself up to the mark with the instances. What has emerged is a prime software program platform with hundreds of consumers and companies which are stickier than ever. Palo Alto thinks it may maintain a median 23% income progress fee over the subsequent few years because it scales up with its prospects’ want for numerous safety companies. For its fiscal 2022, it is forecasting a year-over-year improve of as a lot as 26%.

Throughout its interval of heightened spending to combine all the acquisitions it made, Palo Alto’s profitability dipped. Nevertheless, that is beginning to change. Free money movement was $1.44 billion during the last 12 months, equating to a wholesome free money movement revenue margin of 32% that the corporate expects to have the ability to keep within the 12 months forward. The steadiness sheet is in good condition, too, with $2.27 billion in money and equivalents and one other $2.09 billion in short- and long-term investments, offset by simply $3.67 billion in debt (within the type of low-interest-rate debt that may ultimately be transformed into inventory).

Shares have largely bucked the latest market stoop skilled by high-growth however richly valued tech shares. Palo Alto’s inventory trades near all-time highs whereas many smaller friends have tanked by double-digit percentages. Even so, at 35 instances trailing-12-month free money movement, the biggest cybersecurity enterprise will be bought for a relative worth and is in nice form because it tries to seize extra safety trade spending within the subsequent few years.  

Fortinet: Now the biggest cybersecurity agency by market cap

Like Palo Alto Networks, Fortinet is usually thought of a “legacy” cybersecurity outfit that predates the cloud computing period. Nevertheless, that is no slouch. Although it trails behind Palo Alto in income (it generated over $3.1 billion in gross sales within the final 12 months), in the intervening time Fortinet has overtaken each Palo Alto and CrowdStrike as the biggest cybersecurity pure play as measured by market cap — even after tumbling about 15% from all-time highs the final couple of months. 

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

Information by YCharts.

There is a good cause for that outperformance. Fortinet is a cash-generating machine, choosing a extra conservative technique of growing new merchandise and expertise in-house fairly than buying smaller friends. The outcome? Practically as a lot free money movement era within the final 12 months ($1.25 billion) as Palo Alto, although Fortinet experiences over $1 billion much less in annualized gross sales. Fortinet’s free money movement revenue margin was a whopping 40% within the final 12-month interval.  

Fortinet nonetheless appears to be like like a incredible funding. Whereas it has constructed out a steady of software program merchandise that generate recurring income, the corporate is a best-in-class developer of chips that assist shield knowledge facilities — the property that make cloud computing doable within the first place. As extra firms improve their IT tools and migrate to cloud and hybrid-cloud operations, Fortinet may have a foot within the door with its {hardware}. 

Fortinet expects full-year 2021 income to be up about 29% 12 months over 12 months, a tempo that might average heading into 2022. Nonetheless, with $1.85 billion in money and equivalents and one other $1.53 billion in short- and long-term investments, offset by debt of simply $1 billion, this can be a excellent cybersecurity enterprise to be invested in proper now. Shares commerce for 43 instances trailing-12-month free money movement, a worthy premium given this long-term winner’s observe report of remarkable shareholder returns.

This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even considered one of our personal — helps us all suppose critically about investing and make choices that assist us change into smarter, happier, and richer.