Looking for Growth Winners? Bernstein Suggests 3 Cybersecurity Stocks to Buy

Every investor is in the game to find the ‘growth winners’ in the stock market. In the previous year, it was clear that AI-focused tech led the way in a bullish market. Now, Bernstein analyst Peter Weed is shifting his focus to 2024, where he sees opportunity in several cybersecurity stocks.

Weed acknowledges that the cybersecurity sector has faced headwinds that did not impact the larger tech scene. The rapidly evolving online and digital threats combined with the fast pace of innovation in the sector, making it difficult for companies to gain traction. But, several firms have done so, and Weed lays out the reasons why they are likely to show continued growth going forward.

“All our newly covered companies,” Weed writes, “are looking to leverage their dominance in their respective customer segments within the network security space, and are developing (many have already shipped) application and cloud workload protection offerings. Given the dominance of our newly covered vendors in their respective customer profile, we believe they are strategically positioned to be platform vendors extending from their network protection starting point.”

The Bernstein analyst suggests three specific cybersecurity stocks for investors to buy, and we’ve opened up the TipRanks database to find out what Wall Street thinks of them. Let’s take a closer look.

Zscaler (ZS)

First on the list is Zscaler, a network security specialist. The company operates through its cloud-native platform, dubbed the Zero Trust Exchange, offering the ability to securely connect apps, devices, and users on customer networks of any type. The functionality, creating secure digital connections, builds trust as it improves user confidence and promotes business productivity. The Zero Trust Exchange operates at various levels, including user-to-app, app-to-app, and machine-to-machine connections.

Building trust is no small task, as evidenced by some of the numbers the company can – justly – boast about. Zscaler’s platform monitors over 360 billion daily transactions, and prevents more than 9 billion security incidents and policy violations per day. In all, the company’s platform processes over 500 trillion signals, every day, vital to AI and machine learning cloud effects.

While Zscaler boasts about the capabilities of its platform and products, the company’s customers are happy with the results. These include reports of 80% faster user experience, 70% cost reduction in digital infrastructure, and a 35x reduction in the number of infected machines. These results come from Zscaler’s ability to eliminate threats, to simplify and secure safe access, and to automate the whole process. The company does this at scale, as its ~7,700 customers have a combined total of more than 41 million regular platform users.

This company’s most recent financial results were reported in November, for its Q1 of fiscal year 2024 (October quarter), and showed continued growth in multiple areas. The company’s top line came to $496.7 million, up nearly 40% year-over-year and $23.27 million better than had been forecast. At the bottom line, Zscaler reported a non-GAAP earnings-per-share of 67 cents; this was up from 29 cents in the prior-year period and was 18 cents over the estimates. At the end of the quarter, Zscaler had $2.3 billion in cash and liquid assets on hand.

In some other important metrics, Zscaler reported a total of 2,708 customers with more than $100,000 in annual recurring revenue (ARR), and of that total, 468 had more than $1 million in ARR. These customer number totals were up 22% and 34% y/y, respectively.

For Weed, the key point here is Zscaler’s solid position in the sector, with sound opportunity for high growth going forward. He writes, “ZScaler’s SSE (security service edge) offerings are tailored for large organizations that are either cloud native or are undergoing cloud migration. There is little difference between SSE needs of a cloud native organization v. those of a legacy on-prem organization undergoing cloud transformation. We expect ZScaler to dominate the SSE market given its strong SWG and ZTNA offering. ZScaler owns its PoPs (points of presence) world over and its cloud delivered services is highly scalable. Given SSE is a nascent technology architecture and ZScaler is well positioned to serve any customer adopting the cloud, we thus, see a long growth runway. We expect its core SSE offering to grow at ~30% CAGR this current decade and its other offerings built around cloud security to also grow at a CAGR of mid 30s.”

The Bernstein analyst goes on to rate these shares as Outperform (Buy), and his price target of $311 implies a one-year upside potential of 29%. (To watch Weed’s track record, click here)

Wall Street gives this stock a Strong Buy consensus rating, based on 37 recent analyst reviews that include 30 to Buy and 7 to Hold. That said, the $240.35 average price target suggests the shares will remain rangebound for the time being. (See Zscaler’s stock forecast)

SentinelOne (S)

Next on our list of Bernstein picks is SentinelOne, a company whose cybersecurity platform is geared to protect the digital infrastructure essential to networked systems. SentinelOne focuses on securing data systems and their associated information, processing, and storage subsystems, and uses AI-based solutions to enable autonomous early detection of and response to threats.

AI is the ‘added value’ in SentinelOne’s product offering, the extra that it uses to attract customers. What it means in real terms, is that the company’s endpoint security platform uses machine learning to constantly teach itself how to better monitor PCs, IoT devices, tablets, smartphones, wearables, medical devices, ‘smart’ digital printers – any device that can be connected to a network and act to originate or receive information.

Endpoint security, SentinelOne’s special focus, is a vital facet of cybersecurity, as these devices are among the most common entry routes for digital threats – think computer viruses, malware, or phishing scams against your laptop or smartphone – and SentinelOne’s system acts to proactively seek and stop these threats.

When we look at SentinelOne’s last earnings release, from fiscal 3Q24 (October quarter), we find that the company beat the forecasts for both revenue and earnings. The company’s top-line came to $164.2 million, or $7.85 million better than had been expected, and the bottom-line earnings, reported as a non-GAAP EPS loss of 3 cents per share, was a nickel better than the forecast.

SentinelOne also reported solid ARR numbers, an important metric for future growth. This figure was up to $669.3 million, for a 43% y/y gain. The company ended its fiscal Q3 with more than 11,500 total customers, of whom 1,060 had an ARR of more than $100,000 each.

Checking in again with Peter Weed, we find the analyst upbeat on SentinelOne and taking care to cite the company’s ability to diversify its product applicability to leverage further growth along with its ability to modernize its product line. He writes, “SentinelOne has a strong presence in the SMB market. Other than its cloud delivered solution it also has an on-prem version of its solution. This allows SentinelOne to serve customers across all 3 latest horizons, even though we believe its core customers are cloud first. Further, we expect SentinelOne to get additional tailwinds as it wins in the highly fragmented SMB space as they modernize their endpoint protection systems. We expect SentinelOne to grow at ~6x through 2030 as it stands well positioned to serve clients across the latest tech horizons.”

Quantifying his stance, Weed gives S shares a rating of Outperform (Buy), with a $34 price target that shows his confidence in a 23% increase for the coming year.

The Moderate Buy consensus rating on SentinelOne’s shares is based on a nearly even split in the 27 recent analyst reviews – 14 Buys and 13 Holds. However, once again, the average target price here of $27.41 implies the shares are currently fully valued. (See SentinelOne’s stock forecast)

CrowdStrike Holdings (CRWD)

Last on our Bernstein-endorsed list is CrowdStrike, a cybersecurity company with top ratings in endpoint security, identity threat detection, and ransomware protection. The company’s Falcon Endpoint Protection platform is both well-known and well-respected, and encompasses a line of products that have helped set the industry standard in the fields of cloud-based security modules, digital security, and online network protection. The company makes its products and platforms available through the popular SaaS subscription model.

CrowdStrike uses AI technology to sort through the barrage of security data, in order to enhance the effectiveness of the platform – and to make threats visible, faster. Faster detection means faster neutralization, which will simplify the security environment. This makes CrownStrike’s system a single agent against breaches, ransomware, and other cyber-based attacks, with maximum protection from the first day it’s installed.

The company gives its customers three reasons to switch to the Falcon products. These are better threat protection, better security performance, and better value from the security budget. The latter is an important point that frequently gets lost in the shuffle – but it’s a fact that, in digital security and network protection, it’s always less expensive to prevent a major incident than to clean up the servers afterwards.

CRWD stock has been a strong performer over the last 12 months, gaining 184% and far outperforming the broader markets. A strong latest financial release, from fiscal period 3Q24 (October quarter), helped its case, too. CrowdStrike reported revenues of $786 million, up 35.3% y/y and $8.62 million better than the forecast. The bottom line, reported as 82 cents per diluted share in non-GAAP measures, was more than double the prior-year quarter’s result of 40 cents – and beat the estimates by 8 cents. The company’s ARR grew 35% y/y in the quarter, and breached the $3 billion milestone, clocking in at $3.15 billion. All in all, it was an impressive performance.

And it impressed analyst Peter Weed, too. The Bernstein cyber expert gives CRWD his seal of approval. Weed likes the company’s cloud-first orientation, and the possibilities that gives for additional expansion: “CrowdStrike’s endpoint protection platform (EPP) offering is cloud delivered and is relevant and equally effective regardless of a customer’s IT architecture. However, given CrowdStrike’s offering is cloud delivered, it is usually adopted by cloud first organizations. This gives it a natural right to win across the latest two IT architectural horizons. Further, CrowdStrike is continuing to curate products to further its push into newer growth avenues such as its next generation SIEM offering. Hence, we believe it can continue to grow at mid-20s this decade driven by growth of its EPP offering.”

For Weed, this adds up to another Outperform (Buy) rating. His price target on CRWD, of $334, implies the stock will gain almost 11% over the course of the year. (To watch Weed’s track record, click here)

Overall, CrowdStrike’s shares have earned a Strong Buy consensus rating, with 40 analyst reviews breaking down to a lopsided 38 Buys and 2 Holds. However, the stock’s strong gains have pushed the share price to $301.35; that is just above the $296.68 average target price. (See CrowdStrike’s stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.