Cyberattacks on network infrastructure have become increasingly common during the era of digital transformation, making the cybersecurity industry one of the most desirable for investors. Presently, the top concern in this area is the looming threat of a debilitating wave of Russian state-sponsored attacks amid the renewing global polarization between the former and the West.
Looming Russian Threat
Time and again, Russia has proved its widespread hacking capacities, with large-scale cyberattacks endangering the national security of several countries including Estonia, France, Ukraine, Germany, and the U.S.
Significantly, on March 15, the U.S. took a key step to ensure the nation’s safety from the crippling effects of Russian cyberattacks, and passed the 2022 omnibus spending bill. Among various other important budget revisions, the spending package of the new ‘Big Ugly’ will raise the budget for the Cybersecurity and Infrastructure Security Agency (CISA) by $568.7 million, which now totals $2.6 billion.
This spending will go toward the prevention of cyberattacks on critical infrastructure and communications systems. Needham analyst Alex Henderson believes that “the implications could be significant for demand of Security products as budgets expand and increase in priority to avoid having to disclose an incident or be subject to potential penalties for non-compliance.”
He points out that enterprises that could formerly cut down their security investments no longer will be able to do so under the new law. Enterprises will be required to report every detail of a breach on their systems to the CISA within three days of the incident and within 24 hours of paying a ransom.
The law is expected to prompt enterprises to ramp up their spending on Defense in Depth and Cloud-Direct Architectures in order to avoid putting their reputations at stake by disclosing the details of a breach.
Evidently, this positions the cybersecurity industry at a position of advantage, as the demand should get a boost.
Rising Number of Vulnerabilities
The growing sophistication and cases of cyberattacks on individual enterprises are also prompting industries to pull up their socks and tighten their security. For instance, the recently disclosed “Log4j” network vulnerability led experts to believe that this could give an impetus to cybersecurity demand in 2022.
“We believe Log4j is driving incremental investments in areas like vulnerability management,” said William Blair analyst Jonathan Ho in a recent research note.
According to research firm Gartner, worldwide cybersecurity spending, at $172 billion, had gone up 13% year-over-year in 2021, which was an acceleration from the 8% growth recorded in 2020. For this year, and also for 2023, Gartner projects 11% growth in cybersecurity spending.
Though the tense environment is a bother across industries, the cybersecurity industry stands to benefit immensely from the scenario. We discuss two stocks that are best positioned to cash in on the opportunity presented by the intensifying threat landscape.
2 Stocks to Look Out for
Palo Alto Networks (NASDAQ: PANW): California-based cybersecurity firm Palo Alto Networks is a leader in network security for enterprises, service providers, and government entities. Its three-platform strategy of operations — network transformation, cloud-native security, and security operation center automation— makes it stand out in the cybersecurity space.
In its last earnings release for the quarter ended January 31, 2022, PANW reported revenues of $1.3 billion, climbing 25% year-over-year. Growth was driven by high-profile deal acquisitions, elevated demand for the company’s advanced security platforms, and overall, an accelerated ramping up of security frameworks across enterprises.
Focus on product innovation, transformation to a subscription-based business model, and platform integration are strengthening Palo Alto’s competitive position.
Recently, RBC Capital analyst Matthew Hedberg raised his price target on the company to $710 from $670 while maintaining a Buy rating. The analyst is upbeat about Palo Alto’s positioning in the current demand environment with a “fast growing” Next Generation Firewall segment and a “durable” FWaaS (Firewall-as-a-service) business. Hedberg included the PANW stock into his top picks taking into account its sustainable double-digit top-line growth with improving margins.
Wall Street consensus sentiments resonate with Hedberg, with a Strong Buy rating based on 20 Buys and two Holds. The PANW stock price projection indicates an average price target of $629.45, indicating an upside of 0.67% from the current level, prior to Tuesday’s market open.
Microsoft (NASDAQ: MSFT): Although not a pure-play cybersecurity company, Microsoft has moved quite a few strong steps into this space. With cybersecurity revenue hovering around $10 billion annually, Microsoft said that its computer security segment is growing at more than 40% year-over-year.
In July last year, Microsoft made two key acquisitions in this space, buying security threat management company RiskIQ and cloud security firm CloudKnox Security in quick succession. The company had also been interested in acquiring Mandiant (MNDT), which was recently whisked away by Alphabet (GOOGL).
Microsoft is particularly focused on expanding its cloud-based security services, giving tough competition to Okta (OKTA), CrowdStrike (CRWD), and Splunk (SPLK).
Last month, Morgan Stanley analyst Keith Weiss said that he expects Microsoft to sustain 15% revenue CAGR through 2026, partially driven by the 400 million plus information workers using Defender endpoint security solutions.
Moreover, earlier this year UBS analyst Karl Keirstead noted that “Microsoft is clearly pitching itself as offering a full security suite, a competitive advantage as customers increasingly want a unified view of threats.”
Interestingly, Microsoft enjoys the consensus rating of a Strong Buy based on 27 unanimous Buys. The average Microsoft price target is $374.88, indicating an upside potential of 20.66% from the pre-Tuesday trading price level.
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