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How To Protect Your Portfolio Against Security Cloud FOMO

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Cyberattacks have become increasingly common in business today – proprietary information as well as confidential customer information constantly being at risk of attack. The digital age has created a new type of criminal that we know as a “criminal hacker.” An individual who is highly proficient in programming that can get through firewalls and security hurdles to your sensitive information.

The point of entry for hackers is increasing as more and more devices becoming integrated into firms’ digital capabilities. Cyberattacks are a modern issue that requires an innovative solution. Here are a few of my favorite security cloud stocks to protect your portfolio from unwanted losses in this sector.

Crowdstrike (CRWD - Free Report) –Mkt Cap: $15.12B, YTD: 9.3%, P/S: 26.85x

CrowdStrike is my high-risk, high-reward play. It a proliferating company with a ton growth priced in but still some good opportunity for stockholder returns if you are willing to bear the risks involved. Its reoccurring revenue streams make it an attractive investment even at excessively high multiples.

CrowdStrike was a part of the 2019 IPO frenzy of unprofitable tech firms, making its shares available to the public June 12th. CWRD IPO’ed at $34 and immediately spike 87% when the shares hit the exchanges, with investors eager to get into this hot security cloud stock.

CRWD investors have been on a wild ride since the IPO, with shares trading as high as $101.88 and now settles down to a price of $63.38.

CrowdStrike is a modern cloud-based solution for the escalating security threats that the internet age has brought. This company leverages AI, cloud computing, and graph databases for its security software. CrowdStrike’s security AI is perpetually improving as it advances from crowdsourcing and economies of scale.

CRWD’s cloud-based Falcon platform is an intelligent and evolving digital protector that detects and stops breaches in real-time.

This firm has been snowballing its customer base, having more than tripled in the past year and a half. CRWD’s Q2 results illustrated year-over-year sales growth of 94%, but profitability is not on the horizon yet.

Valuations for CRWD are exceptionally high due to its enormous future growth outlook and reoccurring revenue model. The shares’ forward P/S is 26.8x, down from its high of 42.7x last month.

CRWD is still finding its market value as shares trades all over the board. I am confident that this company has a bright future ahead, but I may wait for the share price to settle down before jumping in.

Okta (OKTA - Free Report) –Mkt Cap: $12.27B, YTD: 60%, P/S: 18x

Okta has redefined the security cloud with identity being the central focus. The Okta Identity Cloud is the start of something brand new to the markets, and this firm is on the ground floor.

User authentication is at the core of any enterprises trust and confidence. Otka enables enterprises to implement a Single Sign-On that is secure for employees and customers alike, allowing them to use any application the business has unlocked for them. It also gives developers the tools to easily implement authentication into their applications.

This company has been growing fast with its subscription base model driving quarter-over-quarter sales growth since it went public in April of 2017. Over the last 2.5 years, this stock has driven up 334% with this year alone illustrating a 60% share price appreciation.

The company still remains unprofitable, but it is growing out its business quickly with over 7,000 customers ranging from fortune 100 to firms with less than 100 employees. The firm’s topline has grown over 50% in fiscal 2018 and ’19, and its expansion is expected to remain in the strong double-digits for the next few years.

This stock has a large amount of growth priced into it with it markedly high valuation. This stock is likely going to experience a lot of volatility as the market uncertainty escalates. I don’t believe that this firm’s subscription base will falter much in an economic slowdown considering its necessity but its valuation might come down.  

Fortinet (FTNT - Free Report) is another enterprise cloud security company that is worth looking at and is currently sitting at a Zacks Rank #2 (Buy).

Take Away

Both of these security cloud stocks that I discussed have fallen harder than the market today due to their high valuation multiples. The market is scared, and the first thing that anxious investors do is evacuate perceived riskier stocks.

These two stocks have yet to turn a profit, but their topline expansion is strong. Security is always going to be a necessity for enterprises no matter what the economic environment looks like. I don’t believe that the underlying fundamentals will change much if these firms get traded down in an economic slowdown. As these stocks get cheaper, they become increasingly attractive. Keep an eye on both of these as we weather the rocky markets in the days to come.

 

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