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The 2 Best Cybersecurity Stocks to Watch

Cloudflare Inc logo displayed on mobile phone

Everyone in the market is focusing on the wave technology stocks launching in artificial intelligence. However, a few critical areas in this transforming economy may better suit investors looking for exposure to the next ‘big thing.’ This time around, it isn’t semiconductor stocks that get the spotlight.

As the global economy goes online and remote—or hybrid—work settings become the norm rather than the exception, cybersecurity stocks could be at the top of investors' and businesses' minds. Needing to keep staff, client, and company information as protected as possible, these stocks include Cloudflare Inc. (NYSE: NET) and even Okta Inc. (NASDAQ: OKTA).

With each of these companies holding significant drivers pushing double-digit upside potential for shareholders shortly, it isn’t only these stocks’ clients that stand to profit from their services but also Wall Street’s so-called ‘smart money’ investors. Before Digging deeper into these drivers, here’s why cybersecurity may be the next gold mine.

New Money Shifts Headed Here

The U.S. economy has been looking down the shotgun barrel lately, as the past quarter only delivered a revised 1.3% gross domestic product (GDP) growth, with inflation rates going twice as high. However, after contracting for more than 15 consecutive months, the manufacturing sector had no credit to take home during these small GDP expansions.

On the other hand, the business services sector, judged by the ISM services PMI index, has carried all the weight in GDP growth by expanding every month since 2021. Fast-forward to May 2024, and the services PMI contracted for the first time since, opening the Federal Reserve’s (the Fed) eyes to a new reality.

This reality has interest rate cuts in its path, to say the least. Now that the economy has no 'legs' to stand on, the Fed could feel pressured to speed up these potential rate cuts, which could be coming as soon as September 2024, according to the CME's FedWatch tool.

With a reasonable timetable underway, cheaper financing and an ample money supply headed into the services sector could amplify business digitalization overall. Okta and Cloudflare stand in the splash zone to see higher demand ahead if this thesis plays out.

Cloudflare Stock Forecast: Analysts Predict Major Rally

Market analysts, particularly those at Needham & Company, see a price target of up to $135 a share for Cloudflare stock. The stock would need to rally by as much as 98.5% from where it trades today to prove these analyst targets right.

It's not that today's prices are near highs; the opposite is true. Cloudflare stock fell down to only 58% of its 52-week high prices, making today's price targets all the more bold of a decision based on where the company stands in the industry.

Cloudflare holds roughly 39.2% market share in the content delivery network space, beating competitors like Inc. (NASDAQ: AMZN). No wonder the Vanguard Group upped its stake in Cloudflare by 1.5% as of May 2024, bringing its net investment to $2.7 billion.

Okta Stock Forecast: Analysts Anticipate Robust Growth

Okta follows a similar path, as Needham & Company analysts found reasons to boost their valuations for Okta stock up to $130 a share. While there is not as much upside as in Cloudflare, this valuation calls for 50.1%, which is more than most stocks offer today, regardless of whether rate cuts come.

Holding a 26.9% market share in the identity and access management (IAM) space, Okta is one stock that investors need to watch in the coming years. Following the digitalization thesis, usernames and passwords (even face IDs) will be managed and kept somewhere, which is where Okta’s services come to shine.

Like its other cybersecurity peer, Okta was attractive enough for Vanguard to increase its investment in the stock by 0.8%, for a total allocation of $1.7 billion today.

Because Okta's stock fell to 77% of its 52-week high, investors can find a reasonable bottom in its dominant industry position.

Bears Are On Retreat Mode

Over the past month, short interest in Cloudflare stock declined by 13.2%, giving bulls a broader path to take over the stock and potentially bring on upside momentum.

While not as recent, Okta’s short interest is now 2.9% of total shares outstanding or $479 million in dollar terms. Today’s level compares to the fourth quarter of 2021 when this balance stood as high as $1.9 billion in short interest.

After these bearish traders retreated, institutional ownership looked like they replaced them. Okta’s institutional ownership is now 86.6%, and Cloudflare’s was reported at 82.7% today, casting a vote of confidence in these two companies.

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