Transcription
The key to finding great stocks before everyone else is understanding a company's products, not just their profits. Huge growth happens when a company has the perfect product for a quickly growing market. Tesla made investors rich by conquering the quickly growing EV market, and Nvidia is making millionaires as their data center GPUs power the quickly growing AI market. In this video, I'll highlight a few stocks in a different market that's growing so fast that it doesn't even matter which company comes out on top. That's a great way to get rich without getting lucky. Your time is valuable, so let's get right into it.
First things first, I'm not here to hold you hostage, so here's everything I'm going to cover up front: the end-of-the-year stock market rally and where we could be in the AI cycle, some of the big challenges that come with AI advancing so fast, the companies solving those challenges in a few key markets, and of course, which stocks are worth watching as a result. There's a ton to talk about, so let's dive right into the end-of-the-year stock market rally. I'm going to play a quick CNBC clip that tells the story as fast as possible, and then I'll follow up with some great charts and additional context as we go. Buckle up because this clip is fire.
All right, let's start off. You're going to actually give us the word of the day today. What is it and why? Fire, because I think this is a tech market that's going to be on fire, not just for the going into the end of the year this week, but what I believe right now: this AI revolution is hitting its next phase, and I think this is just still the start of a fourth industrial revolution. Now, the second derivative, the software piece of AI, is here. I think in 2025, that's going to be the key. You look at Elastic, Snowflake, names like MongoDB; they're the ones now that file names like Palantir in terms of the software use cases. I believe software has underperformed, but if you look in 2025, I think a year from now we sit here and we're like, "Software is fire." We're talking about two trillion of AI capex now. Software—they weren't on the velvet ropes behind, you know, Nvidia, Microsoft, hyperscalers. Software is like, "Let us into the party." The party's here.
Okay, so this is a really interesting observation by Dan Ives. If you've been following this channel for a while, you know that I like to invest in companies with platforms that other businesses pay to build on top of. Because my background is in electrical engineering, I tend to focus on hardware platforms like AI chips, data center infrastructure, and self-driving cars. That's done really well for me over the last few years. But even though many software stocks have underperformed the market in 2024, Dan Ives thinks that they'll outperform in 2025 because we may be entering the next phase of the AI revolution.
So the obvious question is: what are these different phases, and which companies will dominate them? Let me show you one possible answer. This is an awesome case study from Morgan Stanley research that looks at how different kinds of stocks performed during the rise of the mobile internet. As the saying goes, history doesn't repeat itself, but it often rhymes. So this case study could help us identify winning stocks in the AI era.
As well, software and service companies like Google and Amazon were the top performers when the mobile internet took off, but they were also the last part of the value chain to rise since giant software and service ecosystems run on top of an established hardware infrastructure like data centers, PCs, tablets, and smartphones. Before the next generation of computing infrastructure, companies can make big moves of their own; chip companies have to build the processors that power them.
So what Dan Ives is saying is that 2025 will kick off the software phase of the AI revolution. Since we've seen chip companies like Nvidia, Arm, and Taiwan Semiconductor grow by 50%, 100%, or even 200% this year alone, and massive data center infrastructure companies like Broadcom, Oracle, and Dell are on the rise as well. Dan Ives also mentioned the $2 trillion in capex that companies invested in AI infrastructure across almost every market. But what may not be obvious is the next challenge that all these companies are about to face, which is the huge amount of data that AI models take to train and then the insane amount of data they'll generate as they're being used—data that needs to be properly collected, analyzed, and stored, especially if it includes personal data like medical and biometrics, online usage behavior, chat logs, transaction and payment information, and so on.
That means data security is about to be a huge issue for companies and consumers across every single industry. Speaking of data, I found out that dozens of online data brokers were selling my personal data, and if you've been getting lots of spam phone calls, texts, or emails lately, they might be selling yours too. That's why I joined DeleteMe, the sponsor of this video. DeleteMe is a hands-free subscription service that will remove your personal information from hundreds of online data brokers. You just sign up, enter your information, and let their experts get to work. They've reviewed over 41,000 listings for me so far and found over 100 data brokers with my information. After seven days, you get a detailed privacy report showing everything they've done. I just got my seventh report, and DeleteMe found hundreds of pieces of my personal information across 46 separate data brokers—not just my name and address, but my mom's and my fiancé's too.
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All right, if Dan Ives is right about us entering the software phase of the AI revolution, then data security is about to be a huge issue for a lot of companies across every market. So instead of guessing which software stocks are going to dominate the market in 2025, we can invest in the one thing that every single market needs, and that's cybersecurity. In fact, the global cybersecurity market is expected to almost triple in size over the next nine years, which is a compound annual growth rate of 12% per year. That's not bad, but the global cloud security market is expected to 5x by 2032, which means it'll grow almost twice as fast.
I'm showing you multiple charts here because cybersecurity is an umbrella term with many different subcategories, just like artificial intelligence has many different subcategories as well, which I often cover on this channel. Because the cybersecurity space is so big and fragmented, I wanted to find a market map to help me understand the space. The best one that I found is this one by Francis, who goes by InvestE Analyst on X, because it breaks things down using first principles and it's very easy to understand.
So let me walk you through it and highlight a few of my favorite stocks along the way. Modern enterprises consist of three things: people, software, and hardware. Those things are all connected by a network that manages, stores, and secures a company's data, which is usually the thing that hackers are after. There are many different kinds of cybersecurity companies that focus on securing different parts of an enterprise. For example, access management and authentication ensure that only the right users with the right permissions can move around the right parts of a network. Identity protection doesn't protect a network at all; it focuses on protecting user information from getting stolen. That's where DeleteMe fits in, but for your personal data on the open internet.
Endpoint protection doesn't protect users at all, focusing instead on securing workstations, laptops, tablets, smartphones, and any other device that connects to a specific network. Despite the global outage this year, CrowdStrike is an awesome company focused on endpoint detection and response. They have an enterprise platform called Falcon to defend against breaches and respond to any attacks that do manage to get through. CrowdStrike's Falcon platform has three parts: they have a library of cloud-based modules that do things like antivirus scanning, firewall management, and locking down different kinds of cyber threats and malware. They also have a proprietary threat graph that tracks the connections between people, their devices, and permissions, and the networks that they have access to, which they can then compare against actual device and network traffic to deal with any anomalies as they come up.
To do that, the Falcon agent is a tiny piece of software that runs on every device to send data back to CrowdStrike so that they know when to run their different cloud modules as well as keep their threat graph up to date. CrowdStrike just reported earnings, and even with the outage, their revenue grew 29% year over year, which beat consensus estimates. One thing to point out about CrowdStrike's revenue is that it's very reliable, with the vast majority coming from recurring subscriptions as opposed to professional services. They're also incredibly sticky, with a 97% gross retention rate and most companies using up to five of their cloud modules. CrowdStrike's total quarterly revenue just surpassed a billion dollars for the first time, and they raised their full-year guidance. On top of that, CrowdStrike is the market leader in endpoint detection and response, with Gartner ranking them above great companies like Palo Alto Networks, SentinelOne, and even Microsoft for the fifth consecutive time.
If you want even more proof of their staying power, CrowdStrike's stock is around 40% for the year after recovering from the outage fiasco this past summer. In case you missed it, CrowdStrike was also added to the S&P 500 this year as well.
All right, let's say that an endpoint does get compromised. That means the networks it has access to are now at risk. Fortinet focuses on intrusion detection systems and firewalls, like their FortiGate systems, which monitor and control network traffic based on predefined security rules. Think of FortiGate as a security checkpoint, but for network data instead of people. FortiGate combines a firewall with a software-defined wide area network that routes traffic through the shortest path, which has two big benefits. First, it improves overall network performance by lowering the average number of hops that data needs to make from point A to point B. But second, it also reduces security risks since that data passes through fewer devices, which means fewer access points for bad actors.
These physical FortiGate machines work best for high-throughput on-premises applications, usually in highly regulated industries like finance and healthcare, which have strict rules about how, where, and even when this kind of data can be stored. Fortinet is always expanding the capabilities of its FortiGate platform, like by adding zero trust network access, which continually verifies the users and services trying to get on a network, or inline sandboxing, which checks software for threats in a quarantined environment before giving it access to a broad network, or inline cloud access security, which extends those same safety controls to applications already on the cloud.
They're also expanding their total addressable market. For example, Fortinet offers firewalls as a service through FortiGate Cloud for companies that don't need physical on-site solutions, and they have a generative AI assistant called FortiAI to help security teams detect and analyze threats, optimize network traffic, and take the right actions as necessary. Fortinet also recently reported earnings, and while their revenue only grew by 13% year over year, their margins expanded to record levels. Fortinet reported massive 83% gross margins and 36% operating margins, making them a profit powerhouse. Just like CrowdStrike, Gartner ranks Fortinet as the market leader for software-defined wide area networks above huge companies like Hewlett Packard, Broadcom, Cisco, and Palo Alto Networks.
Fortinet's hardware platforms are why I put them on my list of stocks to get rich without getting lucky in 2024, which is a list I made almost a year ago and have been tracking ever since without removing or adding any companies. Fortinet's stock is currently up by over 60% year-to-date, and it's well positioned to make my list again in 2025.
The other cybersecurity stock on my list is Palo Alto Networks, which is also up over 30% year-to-date. While CrowdStrike and Fortinet are more specialized, Palo Alto Networks serves several cybersecurity sectors all at once, and they do it well. Gartner ranked Palo Alto Networks as a market leader in a wide variety of cybersecurity submarkets, like security service edge, endpoint protection alongside companies like CrowdStrike and Microsoft, and network firewalls alongside Fortinet. They're the only leader in single vendor secure access service edge, or SASE. Think of that as another kind of data security checkpoint, but specifically to inspect web traffic for malware.
Palo Alto's broad reach across the cybersecurity spectrum puts it in a great position to grow as they tackle the new kinds of cyber threats that come with the mass adoption of generative AI. In fact, Palo Alto's security platform called Prisma has AI capabilities of its own to do things like automated app discovery, safe app onboarding, and continuous trust verification. They recently launched a new platform called Precision AI, which helps businesses augment the detection, prevention, and response to AI threats. It integrates different AI and machine learning models from Palo Alto's other security software platforms like Prisma, Strata, and Cortex to identify different attack types, bad actors, and where they came from.
Palo Alto Networks also just reported earnings, and their annual recurring revenue from their next-generation security applications grew by 40% year over year. That's the revenue from their software platforms like Prisma and Cortex, and they're looking to roughly triple that by 2030 to $15 billion in recurring revenue from their next-generation security platforms. If they hit their goal, that would be a 24% compound annual growth rate for the next five years. Palo Alto Networks also reported strong gross margins of 77% and operating margins of 29%, exactly what we want to see from these kinds of software platform companies. Just like CrowdStrike's Falcon and Fortinet's FortiAI, Palo Alto Networks has a set of generative AI co-pilots for each of their platforms as well.
So all three of these companies are fighting fire with fire when it comes to cybersecurity and AI. Besides being some of the first companies to use generative AI for cybersecurity, I think that CrowdStrike, Fortinet, and Palo Alto Networks will do very well in 2025 for a few key reasons. If you feel I've earned it, consider hitting the like button and subscribing to the channel. That really helps me out and lets me know to put out more content like this. Thanks!
With that out of the way, here's why I think these stocks will be solid investments in 2025. First, they each address different areas of cybersecurity, and they're all market leaders in their respective areas. Second, they all reported strong earnings, even though many software companies underperformed the market in 2024. Third, they're all in the S&P 500 and the NASDAQ, which means most investors and institutions already hold these companies.
On top of that, as generative AI gets integrated deeper into our smartphones, tablets, laptops, and workstations, everyone on Earth is going to consume, produce, and transmit a lot more data and new kinds of data, which means data security is going to be a serious issue for every single industry. That means many different areas within the cybersecurity industry will grow even faster than most analysts predict since we'll also see new kinds of chips, devices, software applications, and data that need to be secured, new rules and regulations for what counts as secure in the first place, new kinds of malware and hacking techniques, and just way more cyber threats in general as AI opens new angles of attack for bad actors to take advantage of.
So comment below if you want me to do a deep dive on any of these companies. This is an area that I'm excited to learn more about in 2025, and I'm happy to share what I find with you. After all, understanding the science behind the stocks is the best way to get rich without getting lucky. If you want to see what else I've been investing in to get rich without getting lucky, check out this video next. Either way, thanks for watching, and until next time, this is Ticker Symbol U. My name is Alex, reminding you that the best investment you can make is in you.