The Only Tech Sector To Invest In And One Stock To Own In It

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Photo by Yiorgos Ntrahas on Unsplash

The Russian invasion of Ukraine has brought to the fore the importance of many sectors, especially in the commodities space. But it has also reinforced the importance of one tech sector in particular: cybersecurity.

In early April, news broke that Russian hackers had launched a cyberattack on the Ukrainian power grid, along with parallel attempts to sabotage the computer systems needed to restore the grid. Ukraine’s power grid had been knocked offline twice before, in 2015 and 2016.

Ukrainian government officials and the Slovakian cybersecurity firm ESET revealed Russia’s—a type of warfare that has gained prominence in recent years, and affected nations and corporations alike.

The move was unsurprising. After all, these types of attacks on critical infrastructure can produce an optimal level of damage relative to the resources employed. In other words, “more bang for the buck.”

Inexpensively produced malware can render targeted systems useless simply by erasing key data. It’s a lot cheaper for someone to disable a power plant by compromising its digital systems than it is to try and destroy it with a missile.

Cybersecurity = Growth Industry

It is this reality that makes cybersecurity relatively immune to the economic ups-and-downs of that affect other tech sectors so much.

The research firm Astute Analytica estimates the cybersecurity industry will grow at a compound annual growth rate (CAGR) of 13.4% during the forecast period of 2021 to 2027, reaching an aggregate value of $346 billion. That is equivalent to 45% of the current U.S. defense budget.

With cyber threats constantly evolving, the need for adaptability in this space lends itself to a software-as-a-service (SAAS) model.

An analysis from the technology research and consulting firm, Gartner, made it clear that a bespoke offering tailored to individual clients’ needs is the preferable option in most cases. Gartner concluded that: “…the permutation of security operation needs is extensive, which means that what works for one entity is unlikely to be the best answer for another.”

The end result is that this leads directly to very positive implications for recurring revenues for the companies providing the cybersecurity services.

Investing in Cybersecurity

The case for investing in the cybersecurity sector looks clear. Especially when you consider that companies within the sector have moved lower along with the ongoing sell-off in tech stocks. The appetite for high-growth tech stocks was waning well before Russia’s invasion of Ukraine, but it’s worth remembering that the long-term structural drivers in the cybersecurity sector not only remain intact, but have even improved.

You could choose to invest broadly in the sector via one of the seven cybersecurity ETFs currently trading. Most of them are down from 2% to 10% year-to-date; however, I would rather try to find a company that will outperform the sector.

Goldman Sachs did this recently and chose CrowdStrike Holdings (CRWD). Goldman said that CrowdStrike’s “valuation is compelling at current levels,” and that while the full fiscal year 2023 enterprise/sales multiple of 17.4 “appears high,” the stock trades at a lowly 0.4 times on a growth adjusted basis. Cash profits of $252 million are forecast to rise to $392 million for the 2023 fiscal year, with a free cash flow yield of 1.3% versus 0.8% the previous year. Goldman concluded that the company sits “in the sweet spot of demand ahead of accelerating deterioration of the threat environment.”

Goldman looks to be on to something here. CrowdStrike’s last earnings report in March was outstanding, sending the stock soaring after its release.

Fourth-quarter sales growth of 63% year over year came from subscriptions increasing by 66% and professional services expanding by 26%. Annualized recurring revenue expanded 65% to $1.73 billion, and remaining performance obligations grew 67% to $2.27 billion, both year over year.

CrowdStrike ended the quarter with 16,325 customers, up 65% year over year. Alongside rapid client additions, it had superb retention metrics, with dollar-based net retention of 124% and gross retention of 98%.

The good times look like they’ll last. Morningstar predicts the company will have a five-year revenue CAGR of 36% thanks to “a rapidly growing customer base, more massive deals, strong retention rates, and customers buying additional security modules over time.”

CrowdStrike has a leadership position in endpoint security, which is the process of protecting a network’s endpoints—such as desktops, laptops, and mobile devices—from threats.

Still, there is ample room for growth: the company currently has landed just 35% of business enterprises, only 3% of the mid-market, less than 1% of small-medium businesses, and also less that 1% of the public sector.

CRWD stock is actually still up about 10% over the past year and 15% year-to-date, which makes it a rarity in the tech space. CRWD is a buy anywhere in the $200 to $230 range.

Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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