Morgan Stanley analyst Keith Weiss noted that cybersecurity remains a top spending priority for organizations around the world.
Weiss noted that long-term tailwinds are intact, as recent technological advancements (GenAI, Public Cloud) expand the attack zone, creating new product opportunities to secure AI and leverage AI to automate security operations.
In the short term, the analyst flagged risks that investors may not fully appreciate heading into 2025.
Read also: This Analyst Downgrades Upstart but Says SoFi Tech Could Become Fintech’s ‘American Express’
Although the spending environment shows signs of stability following the US election, budgets remain tight as CIOs and CISOs look to consolidate multiple vendors. Some of the most important security players (Palo Alto Networks, Inc. PANW And CrowdStrike Holdings, Inc. CRWD) have only recently stepped up their short-term discounting and “platforming” efforts to drive consolidation and accelerate stock gains. This will likely have a broader negative impact on prices in 2025.
The average security company generates approximately 7% of its revenue from the U.S. public sector. The federal government has spent over $20 billion annually on security products and services (+10% CAGR over the past 5 years), which has been a significant source of growth for security vendors in recent years .
As the new US administration proposes substantial reductions in federal spending through initiatives such as DOGE (Department of Government Efficiency) and recent reports on downsizing the CISA (Cybersecurity and Infrastructure Security Agency), this could constitute a hurdle for IT/security budgets next year.
After a significant increase in 2023, new signs indicate that ransomware attacks may be reaching their peak. Security stocks outperformed broader software, thanks to multiple expansions following negative estimate revisions.
Current stock valuations are above the overall software and long-term average, reflecting improved future growth rates and a more balanced risk-reward ratio.
Weiss was looking for idiosyncratic opportunities in companies with emerging product cycles, particularly those aligned with GenAI. This includes Cloudflare, Inc. NETwhich has a chance in Edge AI inference.
The analyst also favors Fortinet, Inc. FTNT and Palo Alto Networks, given the network security refresh in the second half of fiscal 2025 and 2026. Turnaround stories such as Okta, Inc. OKTA also caught the analyst’s attention.
Weiss noted Fortinet as a multi-year positive reviews story with firewall refresh demand continuing through 2027 and higher software connection rates leading to stronger, longer-term recurring service growth at from the refresh cycle.
The analyst favored Okta due to the stabilized demand environment, easing competitive headwinds and the start of new product cycles.
Weiss also reported Varonis Systems, Inc. VRNS as the SaaS transition tailwind drives further acceleration in ARR growth over the next 2-3 quarters and a stronger position as an enabler of GenAI becomes more evident given the increasing priority of data security/governance.
Weiss took Cloudflare from equal weight to overweight and increased the target price from $92 to $130. The analyst moved Okta from equal weight to overweight and raised the price target from $92 to $97.
Longer term, Weiss continues to favor platform consolidators Palo Alto Networks and CrowdStrike Holdings, but noted minor near-term upside, both of which are deliberately discounted to consolidate their long-term market share. The multiples of both stocks are higher than historical averages.
The analyst reported a more favorable setup for both in the second half of FY2025.
Price Actions: NET stock is up 6.52% at $106.34 at last check Monday. OKTA is up 3.79%.
Read also:
Image via Shutterstock
News and market data powered by Benzinga APIs
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
