Seems like April Fool’s Day means we should cover the Motley Fool… so we’ll look at an ad I’ve been getting from them about the next big AI wave.

And no, it’s not biotech — though I’m sure we’ll cover more of that soon, too, because everyone and his brother is spittin’ hype about biotech stocks and the miracles that will come from using AI in drug discovery, particularly because biotechs often soar higher when the Fed goes into a rate-cutting cycle. Short answers there? The “AI Drug Discovery” stocks that have gotten the most attention so far are Exscientia (EXAI), AbCellera (ABCL), Schrödinger (SDGR), Absci (ABSI) and Recursion (RXRX), though most biotech investors want to forget BioXcel Therapeutics (BTAI), one of the prominent “Drug discovery AI” IPOs from the pre-COVID era… and if you want to stretch the AI story a little in the biotech world you can throw in Lantern Pharma (LTRN), Benevolent AI (BAI in Amsterdam), Relay Therapeutics (RLAY), Predictive Oncology (POAI), or a few of the other “precision/targeted” biotech stocks that are starting to more prominently sell themselves as artificial intelligence stories. We’ve written about most of those at least once or twice, and I’m sure many of them will come up again.

This time, though, no biotech — we’re talking cybersecurity.

Here’s how the ad for Motley Fool Stock Advisor tempts us…

“AI is completely disrupting another industry.

“An industry predicted to cost the world a jaw-dropping $10.5 trillion annually by 2025 (and growing).”

Well, I already let that cat out of the bag — yes, that industry is “cybersecurity.” More from the pitch:

“In a time where businesses can trim budgets and staff, cutting corners on cybersecurity isn’t an option. In fact, a 2023 Statista survey showed that 89% of board members of professional companies expect an increase in their cybersecurity budget in the next 12 months.”

And the Fool is recommending four different cybersecurity stocks… which ones, you ask? Here are some clues:

“One such company that we believe will benefit from the increasing need for cybersecurity tools is pioneering the use of AI.

“They process over 2 trillion events per day and make 180 million indicators of attack decisions every second, bringing their AI models to the forefront of combating sophisticated cyber threats, particularly ransomware.”

That’s CrowdStrike (CRWD), which has been a Fool recommendation in the past. In fact, they were probably pitching CrowdStrike as one of their “Next Magnificent 7” stocks just about a month ago.

My opinion on that one hasn’t changed — it’s probably among the most scalable businesses I’ve looked at in cybersecurity, but at this price it would really have to be. CRWD is consistently profitable and has growing very quickly, with revenue and earnings growth both expected to be in the 25-30% neighborhood over the next couple years, but it’s also changing hands right now at about 100X forward earnings estimates. The only other giant player in this space, Palo Alto Networks (PANW), is expecting roughly 15% revenue growth and 20% earnings growth, and is valued at about 50X forward earnings, so none of the big players are trading at real discount prices right now.

And we get some clues about their second pick, too…

“Another company we believe is poised to profit is not a name that comes up right away when discussing cybersecurity. And yet, they are at the forefront of AI and have created a cybersecurity system that’s already paying off — netting them over $20 billion in annual revenue, and growing.

“Their CEO even bragged, ‘We are the only company with integrated, end-to-end tools spanning identity, security, compliance, device management and privacy, informed and trained on over 65 trillion signals each day.'”

That’s Microsoft (MSFT), whose cybersecurity business got over that $20 billion level in annual revenue way back in 2022… and yes, they’ve certainly got their thumb in that pie still today, though it’s hard to argue that it’s the driving force behind their business success at the moment. Total revenue at Microsoft is about $225 billion now, and about a third of that drops all the way down to net income ($82.5 billion last year), so yes, $20 billion and growing makes cybersecurity an important revenue driver for Microsoft… but it’s a long way from being a cybersecurity “pure play” who will especially benefit from heavy cybersecurity spending. For context, that makes cybersecurity about half as big a revenue driver as Microsoft Office, though it’s bigger than their Gaming or LinkedIn revenue streams.

And yes, Microsoft is arguably the largest company in the world right now, and it’s an exceptional business — great margins, huge return on equity, very efficient, and solid 10-15% revenue growth over a long period of time (earnings growth has been higher than that, about 20%/year for the past five years). It’s also among the most expensive of the large companies, trading at about 35X forward earnings, and with a dividend yield of a bit under 1% now. I wouldn’t ever bet against Microsoft, they have some real near-monopolies in corporate software and have built a fantastic second-place (to Amazon) cloud business through their connections to those corporate customers, but I can’t say that I’m at all tempted to buy the stock with a three trillion dollar valuation and at 38X trailing earnings.

Who might the other two stocks be?

No clues were dropped, and no hints given, so we can’t say with any certainty… but we could guess that they are probably other picks that have long been Motley Fool favorites, as tends to be the case with these “special report” promos. The other cybersecurity stocks that we know the Fool has touted in the past include Palo Alto Networks (PANW), Cloudflare (NET), Fortinet (FTNT), Okta (OKTA), Cisco Systems (CSCO), and Zscaler (ZS). My guess, given their past behavior, would be that Fortinet and Zscaler are the two stocks joining CrowdStrike in this particular four-stock portfolio, but that’s just a guess.

There are also two decent ETFs that focus on cybersecurity, First Trust Nasdaq Cybersecurity (CIBR) and Amplify Cybersecurity ETF (HACK), and both have similar portfolios, and have pretty closely tracked the S&P 500 over the past decade (HACK has under-performed of late), so despite the clear corporate focus on cybersecurity and the need for more tools, the sector as a whole has not been uniquely fantastic… probably partly because there’s some meaningful competition, and partly because most of the big players have been through at least a few disappointing quarters along the way when growth slowed or they lost customers. It’s strange to realize that overweighting the cybersecurity sector would not have helped you at all over the past decade…

Here’s a chart of just the past three years showing the wide spread of performance within this area — that’s SentinelOne (S), Okta (OKTA) and Zscaler (ZS) lagging at the bottom, and Palo Alto Networks (PANW) and CyberArk (CYBR) leading the way, with Fortinet (FTNT) and Crowdstrike (CRWD) closer to average. That’s not all of the cybersecurity stocks, but it’s a decent sampling…

Have any favorite plays on AI and cybersecurity that you think we should add to that list? Or favorites in this list? let us know with a comment below… thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of Amazon, Cloudflare and Schrödinger. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.