The Nasdaq-100 index monitors the stock price performance of 100 of the largest technology companies listed on the Nasdaq stock exchange. It’s often used as a barometer for the broader tech sector’s performance, and in 2022, it plunged 33%.
It was the index’s worst annual decline since the 2008 financial crisis. And yet, surprisingly, that poor performance might actually be good news for investors in 2023.
Consecutive down years are incredibly rare
The Nasdaq-100 was formed in 1985. In the 37-plus-year stretch since then, there has only been one period when the index declined in back-to-back years. That was during the dot-com bust from 2000 to 2002, which was one of the worst tech sector crashes in history.
The rest of the time, the Nasdaq-100 bounces right back after a losing year, which is a positive sign for 2023. Excluding the dot-com instance mentioned above, the index has soared an average of 52% in the years immediately following a loss.
If history repeats, the Nasdaq-100 could finish 2023 at 16,511, which would be near an all-time high! But the broader stock market has to navigate some troubled waters for that scenario to play out. Inflation is still well above the U.S. Federal Reserve’s 2% target, which means interest rates could remain elevated for some time. Plus, the world is battling a tricky banking crisis right now, adding uncertainty into the mix.
Nonetheless, this could be a great time to buy quality stocks at a discount. In this instance, I want to shine the spotlight on the cybersecurity industry. Why? Because according to a survey by Morgan Stanley last year, that’s the expense companies are least likely to cut even if the economy falls into recession. Zscaler (ZS) and Tenable (TENB) are two of the industry’s leading companies, and here’s why they’re a buy now.
1. Zscaler’s Zero Trust technology is a game changer
With an increasing number of companies operating online using cloud computing technology, the attack surface is forever growing. That means malicious actors can strike from any location in the world, so businesses need around-the-clock cybersecurity protection to keep their valuable digital assets and applications safe. Zscaler’s Zero Trust technology takes that protection to new heights.
Remote work is now commonplace within large organizations, and that’s typically a great thing because it means companies can select workers from a global pool of talent. But those team members are a point of vulnerability from a security perspective — how does an organization know it’s really them logging into the network? What if their credentials were compromised?
Zero Trust treats everybody as hostile. When that employee tries to access an online application, Zscaler analyzes not only their credentials, but also their location and the device they’re using to confirm it’s truly them. Moreover, rather than connecting the worker to the entire network, Zero Trust only gives them access to the application they need — so even if a hacker still finds a way in, they can’t jump across to other assets.
Zscaler serves over 6,000 customers around the world, including 380 large organizations spending at least $1 million annually with the company. Zscaler expects to generate $1.56 billion in revenue during fiscal 2023 (ending July 31), and if it hits that mark, it would represent a compound annual growth rate of 52% since the company listed publicly in 2018.
Plus, it has begun to prioritize profitability, slashing its net loss by more than 40% in the recent second quarter (ended Jan. 31) on a year-over-year basis. In this tough stock market environment, investors want to see a mixture of growth and responsible spending. Over time, this strategy could make Zscaler stock more attractive, especially since it’s down 71% from its all-time high right now.
That might be an opportunity for investors with a little patience because the cybersecurity industry is likely to only grow more crucial in the coming years.
2. Tenable’s best growth might still be ahead
Advanced threats call for proactive tools, and Tenable is a leader in the vulnerability management segment of the cybersecurity industry. The technology actively scans networks on a continuous basis, hunting for weak spots and lurking threats. Tenable’s Nessus platform is the most widely adopted on the market, serving over 40,000 organizations, including 60% of the Fortune 500.
The Expert version of Nessus is the industry’s first vulnerability management tool that protects traditional on-premise infrastructure in addition to cloud-based networks, and the mobile endpoints used to access them. But Tenable also offers a portfolio of industry-specific cybersecurity solutions whether a customer is in retail or manufacturing. The company estimates one-third of retailers have lost revenue to a cyberattack, which is why eight out of the top 10 rely on Tenable for protection.
Tenable’s revenue came in at $683.2 million in 2022, and since 2018, it has grown at a compound annual rate of 26%. Larger organizations with more complex needs are driving much of that growth, because the number of them spending at least $100,000 per year with Tenable has more than tripled over that same period to 1,420 at the end of 2022 — representing a compound annual growth rate of 33%.
But all of those figures might be set for an acceleration in the future thanks to the introduction of Tenable One. It’s a new, fully unified platform that aggregates some of the company’s best products from vulnerability management to cloud security to web app scanning, and management says it’s already seeing rapid adoption. It’s another milestone on the path to capturing what Tenable believes will be a $25 billion market opportunity by 2025.
Despite the company’s robust growth, leadership position in a critical segment of cybersecurity, and future potential, its stock has been swept up in the broader sell-off in the technology sector. As a result, it trades at a price-to-sales ratio of 7.3 right now, which is near its cheapest level since 2019. That spells opportunity for investors, especially those with a long-term horizon.
— Anthony Di Pizio
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Source: The Motley Fool