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Cyberwarfare..
Governments, corporations, and individuals are equipping themselves with cybersecurity solutions and software.
“While there are no specific or credible cyber threats to the U.S. homeland at this time, Russia’s unprovoked attack on Ukraine, which has involved cyber-attacks on Ukrainian government and critical infrastructure organizations, may impact organizations both within and beyond the region, particularly in the wake of costs imposed by the United States and our Allies.
Every organization—large and small—must be prepared to respond to disruptive cyber activity.”
— The U.S. Cybersecurity & Infrastructure Security Agency (source)
The Cybersecurity Risks
Russian forces launched an attack on Ukraine on February 24, causing the United States to issue sanctions (economic warfare) upon Russia. In turn, this caused the value of the Russian Ruble (native currency) to collapse in value.
Russia’s stock market has also crashed -80% since February 1st.
As you may have read in this post, we’re navigating a lot of uncertainty right now. Even as I write this, it appears that Russia has taken over a major nuclear power plant in southeast Ukraine.
While we’re not positive where the physical warfare will go — we pray for no nuclear warfare, but we are nearly certain of heightened cybersecurity risks worldwide.
Right now, the world has a front-row seat to what could possibly turn into a full-scale cyber war. In 2008, Russia showed their hacking capabilities during the Georgia conflict — causing mass chaos to government systems.
Five years ago, Russia conducted NotPetya — a cyber attack targeting Ukrainian power, transportation, and financial systems. The attack spread across the globe causing companies in the US, UK, France, Germany, and India to suffer massive disruptions.
The White House estimated the total worldwide cost from this attack was over $10B.
Earlier this year, Microsoft warned of malware attacks happening against the Ukrainian government, non-profits, and IT organizations. If NotPetya taught us anything, it’s that these attacks can spread quickly once they are activated.
The Cybersecurity Solutions
Cybersecurity has grown in popularity as more and more companies migrate their operations to the cloud. In this post, I intimately shared the current cybersecurity landscape, its projected growth, and its biggest winners.
Conflict in Ukraine amplifies, and perhaps permanently accelerates, the need for cybersecurity.
Let’s spend some time walking through the recent earnings results of two high-profile and highly-successful cybersecurity companies — Palo Alto Networks (PANW) and Fortinet (FTNT).
Palo Alto Networks (PANW)
$554 / share at time of writing
As may already know, Palo Alto Networks provides cybersecurity solutions worldwide — specifically firewall, security management, and virtual systems software.
Throughout the last ~5 years or so, they’ve been able to more than double their annual revenue — with FY2021 revenue coming in at $4.3 billion (+25%).
This growth is catalyzed not only by cybersecurity tailwinds as a whole, but the 1,000+ customers who spend $1M or more with the company annually. Palo Alto Networks closed a total of 221 seven-figure ($1M+) deals just this last quarter.
Looking forward, Palo Alto Networks guided to $1.4 billion in revenue during the coming quarter — an increase of +26% year-over-year. For the entire year of 2022, Palo Alto Networks is expecting to generate $5.4 billion in revenue — +$1.1 billion more than they did in 2021.
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Palo Alto Networks has also received very favorable feedback from analysts on Wall Street.
Wedbush:
“In addition, we believe the recent high profile hacks is adding to incremental deal flow and pipeline opportunities in the field and translating to the white hot growth that cyber security players are seeing across the board — with bellwethers like Palo Alto front and center.
We believe this is a cloud cyber security re-rating story in motion and view Palo Alto’s stock as having a strong upward trajectory despite overall market jitters.”
— Daniel Ives ($630 price target)
Mizuho:
“Despite supply chain challenges, revenue was better than expected and the company once again raised their full-year 2022 outlook. We reiterate our view that Palo Alto Networks easily possesses the strongest array of cloud assets among traditional network security vendors.
Palo Alto Networks remains one of our top picks, and we reiterate our Buy rating.”
— Gregg Moskowitz, CFA ($625 price target)
Fortinet (FTNT)
$329 / share at time of writing
Similar to Palo Alto Networks, Fortinet also provides firewall software — as well as intrusion prevention, anti-malware, anti-spam, and virtual private network software.
Fortinet has been able to benefit from the ongoing cybersecurity tailwinds — having grown revenue from $1.5 billion to $3.3 billion in 5 years. Wall Street expects the company to tack on another $1B+ in revenue this calendar year.
The company has done an incredible job of generating free cash flow for their shareholders. In 2021, Fortinet generated $1.2 billion in FCF — catalyzed by their ~77% gross profit and ~25% operating margins.
Tech companies generally follow a metric to determine success called the “Rule of 40.” Essentially, a company is determined to be successful if when adding their annual revenue growth (%) to their operating margin (%) you deduce “40” or higher.
Fortinet takes this very seriously, and has done an incredible job of checking this “box” off its to do list annually since IPO.
Looking forward, Fortinet expects their revenue to grow by +30% during 2022 — coming in around $4.3 billion. Assuming historical margins, this will likely yield ~$1.6 billion in free cash flow — or $9.70 in FCF / share.
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Fortinet has also received very favorable feedback from analysts on Wall Street.
Stifel:
“We continue to believe Fortinet is well-positioned to be a net-share gainers and has a number of drivers to sustain at least mid-to-high-teens top-line growth along with the Rule of 40 in coming years.
Given this backdrop, we remain buyers.”
— Adam Borg ($395 price target)
Wedbush:
“In a nutshell, billings growth upside, strong FCF, and a healthy pipeline should be the trifecta to drive this stock higher as this remains in our cyber security basket to play the sector.”
— Daniel Ives ($350 price target)
Cybersecurity remains the exposed underbelly of democracies around the world. I hope this succinct post was able to shed some much-needed light on the world we’re now navigating.
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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