The cybersecurity stocks most benefiting from AI

AI’s impact on cybersecurity: The integration of artificial intelligence in cybersecurity is creating both new opportunities for protection and increased threats from sophisticated attacks.

• The cybersecurity industry is experiencing a natural affinity with AI, as both cyber threats and defenses are computer-generated.
• Generative AI platforms are now emerging to enable threat detection and prevention before attacks occur.
• According to McKinsey, 51% of organizations believe generative AI is driving new cybersecurity risks, but only 33% are actively working to mitigate these risks.
• The World Economic Forum predicts AI could push cyber incidents and data breaches to a new record high in 2024, following a 72% year-over-year increase in 2023.

Leading cybersecurity companies’ AI initiatives: Major players in the industry are rapidly developing and deploying AI-powered solutions to address the evolving threat landscape.

• Palo Alto Networks has seen its AI Annual Recurring Revenue (ARR) grow 4x year-over-year, surpassing $200 million.
• Zscaler’s AI Analytics solutions contributed nearly 3 points to new and upsell business growth in Q4 2023.
• Fortinet reported that AI-driven Security Operations (SecOps) accounted for 10% of total billings in fiscal Q2.
• CrowdStrike is developing Charlotte AI, a generative AI-powered security analyst, though it has not disclosed specific AI-related revenue figures.

Palo Alto Networks: Leading the AI charge: The company is experiencing rapid growth in its AI-powered offerings and is positioning itself as a leader in the AI-cybersecurity space.

• Palo Alto’s AI ARR accounts for nearly 5% of its Next-Gen Security (NGS) ARR.
• The company’s Cortex XSIAM platform has seen a 4x year-over-year increase in customer count.
• Palo Alto expects its NGS ARR to grow 34% to 36% year-over-year in Q1 of fiscal 2025, reaching between $4.33 billion to $4.38 billion.

Zscaler: Investing heavily in AI infrastructure: The company is seeing strong early adoption of its AI Analytics solutions and is ramping up investments to support future growth.

• AI Analytics contributed 2 points to Zscaler’s growth for the entire fiscal 2024.
• The company is increasing data center CapEx by approximately 3 points as a percentage of revenue compared to fiscal 2024.
• Zscaler expects its free cash flow margin to decline from 27% in FY24 to 23.5% to 24% in FY25 due to these investments.

Fortinet: Steady AI contribution with room for growth: While Fortinet’s AI-driven SecOps have maintained a consistent share of billings, the company is taking steps to expand its AI capabilities.

• AI-driven SecOps accounted for 10% of total billings in fiscal Q2, flat year-over-year.
• Fortinet acquired Lacework to broaden its AI security portfolio, potentially adding $10 billion to its total addressable market (TAM).

CrowdStrike: Focusing on AI-powered efficiency: Although not disclosing specific AI revenue figures, CrowdStrike is leveraging AI to enhance its product offerings and improve operational efficiency.

• The company sees a $225 billion AI-native security TAM by 2028.
• CrowdStrike’s Charlotte AI is being trained for various cybersecurity tasks, including malware reverse engineering and incident response.
• The adoption of CrowdStrike’s modules remains strong, with 45% of customers using 6+ modules and 29% using 7+ modules.

The long-term potential of AI in cybersecurity: While current AI-related revenue figures may seem modest, the industry is poised for significant growth as AI capabilities mature and threat landscapes evolve.

• Cybersecurity stocks are commanding premium valuations due to their early exposure to AI revenue streams.
• The sector is one of the few in the software industry where tangible AI revenue is already being generated.
• As AI continues to reshape both cyber threats and defenses, companies that successfully leverage AI technology may be well-positioned for long-term growth in the cybersecurity market.