The U.S. economy contracted in the first quarter, as gross domestic product dropped at an annualized pace of 1.5%, according to the Bureau of Economic Analysis. That data has reinforced the idea that the country may be headed for a recession, and many investors have sold stocks to hedge against that risk.
Despite that downturn, Zscaler (ZS 2.67%) and Okta (OKTA 4.99%) delivered strong financial results in their latest quarterly reports. Both companies are leaders in the critical cybersecurity industry, and that should keep them growing through any recession.
Here’s why now is a good time to add these two monster growth stocks to your portfolio.
Cybersecurity specialist Zscaler has become a key enabler of digital transformation. Traditionally, organizations have secured their infrastructure by routing traffic through a centralized data center, which itself was protected by on-site security appliances. But the rise of cloud computing has made those legacy solutions ineffective because sensitive data is often stored outside the corporate perimeter.
Zscaler helps clients modernize their infrastructure. Its platform accelerates and secures corporate networks and cloud workloads, allowing employees to safely connect to corporate applications and the open internet from any device or location. Better yet, Zscaler operates the largest network security cloud in the world, handling over 240 billion requests each day. To that end, Zscaler identifies and blocks millions of threats on a daily basis, and each one makes its artificial intelligence engine a little smarter.
To put its market position in context, research company Gartner recently recognized Zscaler as an industry leader for the 11th consecutive year. Not surprisingly, those accolades have come alongside strong financial results. In the most recent quarter, revenue soared 63% to $287 million and cash from operations rose 5% to $77 million. Better yet, remaining performance obligation jumped 83% to $2.2 billion, implying strong future revenue growth, and the company raised its full-year outlook.
Going forward, shareholders have good reason to be optimistic. Enterprises are pouring money into digital transformation projects, and the continued adoption of cloud computing and remote work should be tailwinds for Zscaler. Moreover, the company has demonstrated its ability to execute in a turbulent market, showing the critical nature of cybersecurity. And with a $72 billion market opportunity, Zscaler still has plenty of room to grow its business. That’s why this growth stock belongs in your portfolio.
Okta specializes in identity and access management (IAM), a branch of cybersecurity that seeks to ensure only the right people and devices have access to sensitive data and applications. Its platform, known as the Okta Identity Cloud, allows administrators to give permission to users and enforce access policies based on context like identity, location, and device, as well as less obvious signals like typing cadence.
In the first quarter, Okta beat Wall Street’s expectations on the top and bottom lines. Revenue surged 65% to $415 million, and while the company reported a widening non-GAAP loss of $0.27 per diluted share, that figure still beat analysts’ consensus estimates, which called for a loss of $0.34 per diluted share. On a less optimistic note, Okta’s cash from operations dropped 66% to $19 million due to an uptick in operating expenses related to Auth0.
For context, Okta acquired Auth0 in March 2021, adding to its portfolio of developer-centric tools that simplify the integration of IAM technology in customer-facing applications. Investors should expect operating expenses to remain elevated as Okta continues to digest that buyout, but in the long run, it should reinforce its strong market presence. In fact, research firm Gartner recently recognized Okta and Auth0 as industry leaders in access management.
Building on that idea, Okta should benefit from another catalyst on the horizon. The company plans to debut its identity governance and administration (IGA) product this year, and the North American launch is slated for this quarter. IGA systems provide additional functionality beyond IAM, including support for workflow automation, analytics, and reporting.
With that in mind, management puts its addressable market at $80 billion. As the leader in the IAM space, Okta is well-positioned to capitalize on that opportunity, and the company has demonstrated that it can execute in a tough macroeconomic environment. That’s why this growth stock is a smart buy right now.
*Stock Advisor returns as of June 2, 2022