Investing in Cybersecurity: Two Stocks to Watch

In the tech world, there has been significant focus on artificial intelligence (AI) spending, but cybersecurity investments are also on the rise. Research firm Gartner predicts cybersecurity spending will climb from $183.7 billion in 2024 to $293.9 billion in 2028, marking a 60% increase.

As cyber threats persist, investors may want to consider two key cybersecurity stocks poised to capture a large share of this growing market.

1. CrowdStrike: A Leader in Endpoint Security

Despite a global IT outage last year, CrowdStrike (NASDAQ: CRWD) remains a top player in endpoint security. The company’s Falcon platform is widely adopted by organizations to secure networks and devices, including smartphones and computers. In 2024, Gartner recognized CrowdStrike as a leader in this field for the fifth consecutive year, highlighting its strengths in vision and execution.

Organizations are increasingly consolidating their cybersecurity vendors, opting for fewer partners to improve efficiency and reduce costs. This trend directly benefits CrowdStrike, evidenced by the growing use of its software modules. Currently, two-thirds of its customers use five or more modules, with 20% relying on eight or more. The Cloud Security, Identity Security, and LogScale modules are particularly popular.

While the previous IT outage caused extended sales cycles and increased scrutiny, CrowdStrike continues to attract new clients and grow within its existing customer base. The company’s impressive 115% net dollar retention rate last quarter reflects this trend. To support affected customers, CrowdStrike introduced customer commitment packages, which may encourage long-term engagement with its services.

Despite the challenges posed by the outage, CrowdStrike’s revenue rose 29% year over year, with subscription revenue increasing by 31%. The company’s annual recurring revenue also expanded by 27%.

With a forward price-to-sales (P/S) ratio of about 18.7, CrowdStrike’s stock is relatively expensive, but its leadership in the cybersecurity sector justifies the premium.

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2. Zscaler: Innovating with Zero Trust Security

In contrast to CrowdStrike, Zscaler (NASDAQ: ZS) focuses on zero trust security. This approach asserts that no user or device should be trusted by default, requiring verification and authorization for access.

The zero trust model has gained significant traction, with Gartner forecasting a rise in zero trust network access spending to $4 billion by 2027. This represents over a 30% compound annual growth rate from 2021 to 2027. The entire identity access management sector, which includes zero trust, is projected to grow from $17.7 billion in 2024 to $25.4 billion in 2028.

Zscaler reported a strong 26% revenue growth year over year last quarter. Like CrowdStrike, Zscaler excels in upselling to current customers, demonstrated by a 114% net dollar retention rate. The Zscaler Private Access solution, which offers seamless zero-trust connectivity, is replacing traditional virtual private networks (VPNs), enhancing its value proposition.

Management identifies the data security market as a growth area, recently securing a seven-figure contract to protect a customer’s Microsoft Copilot data, which they view as a promising opportunity.

Moreover, Zscaler is making notable advances in government contracts, being adopted by 14 of the 15 cabinet-level agencies that seek to improve security through zero-trust systems and reduce costs by eliminating firewalls and VPNs.

Currently, Zscaler’s stock trades at a forward P/S ratio of 9.2 based on its fiscal 2026 estimates, a reasonable valuation considering its growth potential.

Conclusion: A Potential Investment Opportunity

For investors looking to enter the cybersecurity market, CrowdStrike and Zscaler offer compelling opportunities. Both companies are well-positioned to benefit from the growing cybersecurity spending trend. An informed investment in these stocks may yield positive results in the long run.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Microsoft, and Zscaler. The Motley Fool recommends Gartner and has a disclosure policy.

The views expressed here are those of the author, and do not necessarily reflect those of Nasdaq, Inc.