The cybersecurity industry has been expanding at a healthy pace over the years. This isn't surprising considering the rising adoption of cloud computing and connected devices, the escalation in cyberattacks, and the growing sophistication of cyber threats.
It goes some way to explain why Gartner expects global cybersecurity spending to increase 14.3% in 2024 to almost $215 billion. That's after cyber spending jumped 10.6% last year. The cybersecurity market is expected to keep expanding at a nice pace over the next decade, generating a projected $534 billion in revenue in 2032.
Considering the secular growth opportunity on offer, buying and holding the right cybersecurity stocks for the next decade could turn out to be a profitable move. That's why now would be a good time to take a closer look at SentinelOne(NYSE: S) and Datadog(NASDAQ: DDOG), two companies that are on track to take advantage of different, but fast-growing cybersecurity niches.
1. SentinelOne
SentinelOne offers an artificial intelligence (AI)-powered, integrated cybersecurity platform known as Singularity, which allows enterprises to prevent, detect, and respond to threats across every endpoint. Its solutions can also be deployed for protecting cloud workloads.
The demand for AI-powered cybersecurity solutions is expected to increase rapidly. According to Grand View Research, the $16 billion AI-enabled cybersecurity market could grow to almost $94 billion in revenue in 2030. SentinelOne reported $573 million in revenue in the trailing 12 months, which means that it is only scratching the surface of a lucrative market.
The expanding market explains why the company has been growing at a terrific pace. Revenue in the third quarter of fiscal 2024 (which ended Oct. 31, 2023) increased an impressive 42% year over year to $164 million. SentinelOne expects to finish fiscal 2024 with $616 million in revenue, which would be a 46% gain over fiscal 2023 levels.
What's more, as the following chart suggests, SentinelOne is expected to clock 30%-plus revenue growth for the next couple of fiscal years as well.
However, don't be surprised to see SentinelOne outperforming Wall Street's expectations going forward and posting faster growth. That's because the company is expanding its customer base and is also winning a bigger share of their wallets. SentinelOne's client count increased nearly 28% year over year in the last reported quarter to 11,500. The number of customers with annualized recurring revenue (ARR) of more than $100,000 rose at a faster pace of 33% year over year.
ARR refers to the annualized revenue run rate of SentinelOne's subscription and capacity contracts at the end of a period. So the improvement in the number of customers with ARR of more than $100,000 points toward greater demand for its offerings. Given that SentinelOne is now integrating generative AI-powered tools into its cybersecurity platform, the company may be able to win more business from its existing customers and attract new ones into its fold as well.
Not surprisingly, analysts are forecasting SentinelOne's earnings to increase at an annual rate of 40% for the next five years. The end-market opportunity in the AI-powered cybersecurity space means that it could sustain such impressive growth for a longer period and turn out to be a solid investment for the next decade.
2. Datadog
Unlike SentinelOne, Datadog isn't a pure-play cybersecurity provider because it sells a cloud-based monitoring and analytics platform. Datadog's software-as-a-service (SaaS) platform enables its customers to monitor cloud infrastructure, networking performance, database, and application performance, among other things.
But at the same time, the company provides a security offering for cloud applications as well, which means that it is well placed to capitalize on a massive growth opportunity. Datadog's cloud security platform enables customers to detect threats in real time, manage vulnerabilities, and carry out risk assessments.
Management pointed out on its fourth-quarter 2023 earnings conference call that more than 6,000 customers are using its cloud security products. Though the company doesn't break out exactly how much revenue it gets from the cloud security space, it expects this market to be a key growth driver. In its investor day presentation, Datadog said that its revenue opportunity in the cloud security market was worth $21 billion at the end of 2023.
It expects this addressable market to increase at an annual rate of 16% through 2027. On the other hand, Datadog points out that its revenue opportunity in the cloud observability market was worth $51 billion last year. This market is forecast to expand by 11% annually for the next five years, indicating that the company is sitting on more than one catalyst.
Datadog generated $2.13 billion in revenue in 2023, an increase of 27% over the previous year. It predicts a 21% jump in revenue in 2024 to $2.57 billion owing to a cautious spending environment by customers, but the long-term growth story remains intact. Its customer base continues to expand at a steady pace and existing customers are adopting more of its services.
As a result, its remaining performance obligations, which is the total value of contracts to be fulfilled by the company in the future, rocketed an impressive 74% year over year to $1.84 billion in the previous quarter. This suggests that Datadog is creating a robust revenue pipeline, so it is not surprising to see analysts expecting solid business performance from it going forward.
Given that the global cloud security market is expected to generate $148 billion in annual revenue in 2032, Datadog could sustain such healthy growth rates in the long run and deliver strong gains to investors.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
