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2 Cybersecurity Stocks Using Artificial Intelligence

It’s been just over a year since we published an article titled “Investing in Artificial Intelligence (AI) Stocks is BS” and already it’s becoming dated. We’re starting to see more and more companies bringing AI front and center to their overall strategies. AI is the new oil, and soon everyone will use it simply to compete with everyone else who is also using it. As investors, we want to take an approach as follows:

  • Check our current investment portfolios to ensure companies we hold are committed to using AI in their operations – especially well established companies like Coca-Cola and Walmart – because that’s where future dividend increases are coming from.
  • Avoid the “Invest in Everything With Google” advice that’s going around. It’s now expected that every company is exploring the use of AI to improve their operations. Sophisticated investors may consider shorting those companies that aren’t investing in AI today when their competitors are.
  • Try and find good opportunities to invest in companies that dominate high-growth spaces already, and that are investing heavily in AI to improve their core offering.

With over 3,000 AI startups out there, it’s likely that the biggest winners in the next decade will be startups that may not have exit events in time for retail investors to participate in their growth. That’s why our last bullet point is so important.

Cybersecurity and Artificial Intelligence

Cybersecurity is one high-growth space that’s getting a lot of attention. That’s because the biggest threat to a company CEO these days, is having your customer’s data spilled out for the world to see by increasingly sophisticated hackers. With the emergence of AI, the attacks will only become more sophisticated, making investment in AI something that every cybersecurity company better be thinking about. Fight fire with fire and all that. We already see a whole slew of startups playing in the AI cybersecurity space, many of which we covered in the below articles:

So how can retail investors take part in the “AI in Cybersecurity” theme? We’re going to look at a few cybersecurity stocks that are using AI.

2 Cybersecurity Stocks Using Artificial Intelligence

Fortinet

We first came across Fortinet (FTNT) in our article on the Top 10 Cybersecurity Companies to Invest In we published a few years back. In that article we talked about the company’s incredibly consistent revenue growth which you need to see to believe:

15-year Compound Annual Revenue Growth of 54% – Source Fortinet

Since going public in November of 2009, shares of Fortinet have soared +587% vs. a Nasdaq return of +227% over the same time frame. Growth for the company should be expected since cybersecurity is growing fast. How fast? Well, we all know that the industry forecasting estimates are fcuking useless and spread out all over the board, so we’re not going to try and cherry pick one to plug in. What most of these talking heads agree upon is that industry is growing at a faster clip than the average industry growth rate. That’s why we would expect to see this stellar share price performance. There’s nothing worse than a company in a high-growth industry that underperforms the Nasdaq.

While you can read all about what the company does in this excellent brochure, we’re here to talk about their focus on using artificial intelligence in cybersecurity. Prominently located on the homepage is a link to a page on their use of artificial intelligence. Over the past five years they’ve been developing FortiGuard AI, a self-evolving threat detection system that uses machine learning to identify threats. Pulling data from 5 billion nodes, the product was unveiled in February of this year along with another application of AI that was detailed in an article by Security Week:

The firm also announced the inclusion ML-based User and Entity Behavior Analysis (UEBA) capabilities into its SIEM product (FortiSIEM). The solution ‘learns’ patterns of normal user or entity behavior, and will then automatically detect anomalies. Concurrent logins from separate locations, users accessing corporate data in the middle of the night, and excessive logins to rarely used servers will all send alerts to the security team for relevant action.

That’s the sort of functionality many of the startups we talked about before have been offering. Maybe Fortinet is late to the game? It doesn’t seem likely, considering the commitment they have made to R&D. FortiGuard labs claims to have “the largest and most mature threat intelligence group in the world”, and the 215 researchers in that group are the ones who developed these new AI capabilities. They could probably be trusted to make the correct build-versus-buy decision, as Fortinet sits on over $1.2 billion in cash. They also appear to be working with SentinelOne, one of the most promising predictive analytics cybersecurity startups out there that we covered before. If technology exists that they don’t have, they’re certainly able to make some acquisitions with their $1.2 billion in cash on hand.

Of course, as we mentioned earlier, every single company out there should be looking to AI as a competitive advantage. What about Fortinet’s competitors? A better question might be, who are Fortinet’s competitors?

If we look at the corporate brochure again, we see that Fortinet doesn’t hesitate to talk about how they’re besting (what we can only assume are) their biggest direct competitors. Well, at least in respect to recent growth and product functionality. Here’s a bit on how they’re growing faster than everyone (at least in the last rolling year) and selling more units than everyone (over the past five years):

Source: Fortinet

Then there’s this diagram Fortinet put together which talks about how superior their product offering is, again listing the exact same names we see above but also adding FireEye:

Source: Fortinet

If we assume that all Fortinet’s competitors are using AI, and we wanted to cherry pick some stocks rather than make the prudent decision to buy a basket of all 10 cybersecurity stocks we told you about before, then picking the companies that are growing the fastest wouldn’t be the worst decision to make. That leads us to our next cybersecurity stock that uses AI and is also experiencing stellar growth.

Palo Alto Networks

Palo Alto Networks (PANW) also appears to be having the same success as Fortinet, at least when it comes to a few key areas – like revenue growth:

Like Fortinet, rapid revenue growth is accompanied by stellar share price performance. Since their July 2012 IPO, shares of Palo Alto Networks have gained +225%, besting returns for Fortinet (+127%) and the Nasdaq (+142%). While past performance is no guarantee of future performance, we better be seeing above-average performance given the high-growth industry they operate in. Just last week, Palo Alto Networks announced that they’re now offering the “Mist Learning WLAN” from Mist Systems. It’s the first AI-driven wireless and location platform. They’re also using machine learning in their endpoint solution, Traps, which you can read more about in this white paper.

Then There’s Cisco

Then there’s Cisco (CSCO), a $208 billion company. While cybersecurity makes up a small part of their overall product portfolio, they’re 10X the size of Palo Alto Networks and 20X the size of Fortinet. They’re also an investor in Mist Systems, which is not a surprise considering how much they invest in startups. One of our MBAs told us that according to his business strategy class, Cisco’s business model is actually the ability to integrate acquired companies quickly and seamlessly. While he could be full of isht like many MBAs are, Cisco Investments does have an active portfolio of more than 2 billion invested in startups. A cursory look at Crunchbase shows us they’re actively increasing that number.

List of Disclosed Cisco Acquisitions in 2018- Source Crunchbase

When we look at last year’s acquisitions by Cisco according to Wikipedia, at least two appear to be related to artificial intelligence.

Source: Wikipedia

Then there’s always the prospect of Cisco swooping in and acquiring either Palo Alto Networks or Fortinet. That wouldn’t be the worst thing for investors in either of those cybersecurity stocks.

While the most prudent thing to do here would be to buy shares in all 10 of the cybersecurity stocks we talked about before plus Cisco, an alternative would be to buy shares in both Palo Alto and Fortinet. We know that both companies are actively using machine learning in their cybersecurity solutions, both companies are growing quickly, both companies are working with some big name AI cybersecurity startups, and both companies have a war chest to acquire said startups if they think it makes sense. (Fortinet has ~$1.2 billion in cash and Palo Alto Networks has ~$1.3 billion in cash.) If you’re going to make an investment in cybersecurity stocks, you’re going to be better off investing in those companies that are using machine learning as a competitive advantage.

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