3 Top Cybersecurity Stocks to Buy in October

While artificial intelligence (AI) may be getting most of the hype in the world of technology, cybersecurity spending remains a priority among organizations as there is no slowdown in cybersecurity attacks. In fact, the threat from AI is expected to help power cybersecurity spending as well.

Both Gartner and IDC see cybersecurity budgets increasing by double digits next year. Let's look at three stocks that should benefit from increased cybersecurity spending.

CrowdStrike

While the company's outage earlier this year somewhat tarnished its reputation, CrowdStrike's (NASDAQ: CRWD) Falcon platform is still considered the gold standard for endpoint security. For those unfamiliar, endpoint security is the protection of a network and its endpoints, such as smartphones and computers, from cybersecurity attacks.

As a reminder, CrowdStrike had a huge global outage earlier this year caused by a bug in a software update. Given that it caused millions of Windows-based computers and tablets to crash, it not surprisingly has had an impact on the company. The main one has been a delay in deals and an extended sales cycle. This ultimately resulted in the company lowering its guidance last quarter.

However, CrowdStrike is certainly not the only cybersecurity company to experience an outage, and it has a bright future ahead of it. The company continues to get organizations to consolidate on its platform, which can be seen in the strong uptake of newer modules. For example, CrowdStrike saw huge growth in its annual recurring revenue for its LogScale Next-Gen SIEM (up more than 140% to $220 million), cloud security (up more than 80% to $515 million), and Identity Security (up more than 70% to $350 million) modules.

Trading at a forward price-to-sales (P/S) multiple of about 15.5 times next year's analyst estimates, the stock is not cheap. But that's below where it has traded at in the past and the bar has been reset lower with the cut in guidance.

SentinelOne

SentinelOne (NYSE: S) is a much smaller and cheaper cybersecurity company operating in the endpoint security space. At a forward P/S multiple of about 8 times next year's analyst estimates, its valuation is almost half of CrowdStrike's. However, both companies grew revenue in the low 30% range last quarter.

Outside of its attractive valuation, SentinelOne also has some nice growth opportunities ahead. Last month, it signed a multi-year deal with Lenovo to provide endpoint security for all its new personal computers (PCs) that the enterprise PC vendor sells. Current Lenovo owners will also have the option to upgrade their security to SentinelOne's Singularity Platform. Lenovo is the largest PC vendor in the world with a nearly 24% market share, selling about 59 million PCs in 2023. As such, this is a large opportunity for SentinelOne.

And while CrowdStrike is unlikely to lose out on much business due to the outage, SentinelOne could benefit from any impact if some potential customers decide to go a different direction. Given its much smaller size, just capturing a small percentage of additional opportunities should help drive growth and its stock price.

Zscaler

Conservative guidance sank Zscaler's (NASDAQ: ZS) stock last quarter, taking it to a valuation of 10.7 times its current fiscal year earnings estimate, which was well below the more than the 15 P/S multiple the company traded at earlier this year.

However, the company has a history of issuing conservative guidance and then easily topping results. For example, last quarter its revenue jumped by 30% to $592.9 million, which was greatly ahead of its prior forecast for revenue of between $565 million and $567 million.

While CrowdStrike and SentinelOne are endpoint security companies, Zscaler primarily focuses on zero trust. This is the area of cybersecurity based on the notion that no individual user nor device should be trusted, and that all users must be verified, authorized, and continuously validated. Zero trust is expected to be one of the fastest-growing areas of cybersecurity, with many research outlets projecting a 15% or more compound annual growth rate over the next several years.

Zscaler uses a "land and expand" model, and growing within its existing customer base has long been a strength. This can be seen in its strong net dollar retention numbers, which came in at 115% last quarter. This metric is based on the trailing 12 months, and a percentage of over 100% shows that existing customers are spending more than they did a year ago.

Image source: Getty Images.

Cybersecurity winners

SentinelOne is my favorite cybersecurity stock given its valuation and recent deal with Lenovo. Meanwhile, Zscaler's stock is attractive after its recent pullback given the strong growing market it is in. While I wish CrowdStrike's valuation was lower, I think the stock will still be a long-term winner given its best-in-class endpoint solution.

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Geoffrey Seiler has positions in SentinelOne. The Motley Fool has positions in and recommends CrowdStrike and Zscaler. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.