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In today's digital age, cybersecurity is more crucial than ever. Telecommunications giant AT&T Inc.'s (T) recent data breach, which affected approximately 109 million accounts, highlights the critical need for robust security measures amidst the escalating cyber risks associated with vast data storage in cloud storage platforms.
In a world increasingly threatened by cyberattacks, companies are ramping up investments in cybersecurity solutions to shield their valuable data and infrastructure. Projections indicate that the global cybersecurity market is poised to hit a staggering $271.9 billion by 2029, exhibiting a steady compound annual growth rate (CAGR) of 7.9% from 2024 to 2029.
Given this promising outlook, investors eyeing growth in the cybersecurity sector can consider two “Strong Buy”-rated stocks, Zscaler, Inc. (ZS) and Tenable Holdings, Inc. (TENB), which are poised to capitalize on the increasing demand for robust security solutions worldwide.
Growth Stock #1: Zscaler
Valued at $29.46 billion by market cap, San Jose-based Zscaler, Inc. (ZS) is a leading cybersecurity company that focuses on enhancing digital transformation by boosting its clients' agility, efficiency, resilience, and security. The company is best known for its Zero Trust Exchange platform, the world's most prominent cloud security solution, which protects thousands of customers from cyber threats and data loss. This platform ensures secure connections between users, devices, and applications across over 150 global data centers.
Shares of this cybersecurity giant have soared 25.8% over the past 52 weeks, edging past the broader S&P 500 Index’s ($SPX) rally of 23.5% during the same time frame.
From a valuation standpoint, ZS stock trades at 18.99 times sales, much lower than its own five-year average of 29.46x, suggesting the shares are reasonably priced at current levels.
Following the company’s impressive fiscal Q3 earnings results unveiled on May 30, shares of Zscaler popped 8.5% in the next trading session. Quarterly revenue hit $553.2 million, marking a 32.1% year-over-year jump, and exceeding Wall Street’s estimates. This strong revenue growth was fueled by increasing customer demand for the company’s Zero Trust Exchange platform. Adjusted EPS of $0.88 showed a solid 83.3% annual improvement, and crushed projections by a margin of 35.9%.
During the quarter, Zscaler’s free cash flow surged to $123.1 million, and the free cash flow margin rose to 22%, reflecting a notable improvement from the year-ago quarter’s $73.9 million and 18%, respectively. As of April 30, the company’s cash reserves swelled to approximately $2.2 billion, highlighting its strong financial health and liquidity.
Reflecting on the Q3 performance, CEO Jay Chaudhry said, “As threat actors evolve and continue to exploit firewall-based security, Zero Trust security remains a top IT priority, and an increasing number of enterprises are adopting our platform. To meet this demand, we are accelerating innovation, expanding our platform and building a strong go-to-market team to scale our business to $5 billion and beyond in ARR."
For Q4, management projects revenue to range between $565 million and $567 million, while adjusted EPS is expected to arrive between $0.69 and $0.70. In fiscal 2024, management expects revenue to range between $2.140 billion and $2.142 billion. Adjusted EPS is anticipated to land between $2.99 and $3.01.
ZS stock has a consensus “Strong Buy” rating overall. Of the 37 analysts covering the stock, 28 advise a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining eight recommend a “Hold.”
The average analyst price target of $232.14 indicates a potential upside of 18.3% from the current price levels. The Street-high price target of $290 suggests that ZS stock could rally as much as 47.8%.
Growth Stock #2: Tenable Holdings
Maryland-based Tenable Holdings, Inc. (TENB) provides Exposure Management, trusted by around 44,000 organizations worldwide to identify and mitigate cyber risks. As the mastermind behind Nessus, Tenable has revolutionized vulnerability management with the world's first platform capable of securing any digital asset on any computing platform. The company’s impressive clientele includes about 65% of the Fortune 500, 50% of the Global 2000, and numerous major government agencies.
Valued at a market cap of $5.3 billion, shares of Tenable have gained 5.6% over the past 52 weeks, and are down 1.8% so far in 2024.
Priced at 6.83 times sales, the stock is priced at a discount to its own five-year average multiple of 7.96x.
On May 1, the company announced its Q1 earnings results, which blew past Wall Street’s projections on both the top and bottom lines. Revenue of $216 million soared 14% year over year, while adjusted earnings skyrocketed by 127.3% annually to $0.25 per share, beating projections by an impressive 43.4% margin.
As of March 31, Tenable’s unlevered free cash flow stood at $54.7 million, while cash and short-term investments surged to $510.8 million, up from $474 million at the close of fiscal 2023. During the quarter, the company supercharged its Tenable One platform with enhanced generative AI capabilities, allowing customers to swiftly summarize relevant attack paths, interact with an AI assistant, and receive specific mitigation guidance.
For fiscal 2024, management projects revenue to range between $900 million and $908 million, while adjusted EPS is expected to arrive between $1.08 and $1.12. Additionally, the company aims for unlevered free cash flow in the range of $220 million and $230 million.
Earlier this week, Tenable landed an "outperform" rating and a $55 price target from Baird. "The rollout of Tenable One broadens its footprint in cloud security, identity and OT, enhancing its exposure management platform," wrote the analysts. "Tenable's strong position in Vulnerability Management is underscored by competitive wins and expanding $100k+ ACV accounts, driving solid revenue/billings growth."
Overall, TENB stock has a consensus “Strong Buy” rating. Out of the 17 analysts offering recommendations for the stock, 14 advise a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining two have a “Hold” rating.
The average analyst price target of $57.62 indicates a potential upside of 28.3% from the current price levels. The Street-high price target of $65 implies that Tenable stock could rally as much as 44.5%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
