KeyBanc says buy these security, data and AI software stocks in 2024

KeyBanc has a positive outlook on steady-to-improving software spending in 2024, and for security, data/analytics and AI to be the top priorities following both its Q4 value-added reseller survey and 2023 year-end CIO survey. The firm’s key ideas include Palo Alto Networks (PANW) and Cyberark Software (CYBR) in security, and MongoDB (MDB) in data/analytics.

2024 OUTLOOK: In security, KeyBanc expects steady-to-slightly faster growth, helped by the new SEC disclosure requirement, high profile breaches and pent-up demand following a tighter spend environment in 2023. Top spend areas in security include cloud, data, and identity. The firm further expects data/analytics budget growth to potentially improve more meaningfully on stable-to-accelerating public cloud growth, the shift of GenAI from the exploration to testing phase, and post peak optimization efforts in the second half of 2022-first half of 2023. With software valuations slightly elevated versus pre-COVID averages and several names currently trading over 10-times the next twelve months revenue, KeyBanc remains selective on high growth names.

KEY IDEAS: Palo Alto is the firm’s key, large-cap ideas for 2024 as a beneficiary of resilient security spend environment, leading consolidator of security, trading at a discount to large-cap software. KeyBanc notes Palo Alto is the leading beneficiary of the ongoing trend toward consolidation, is executing better transitioning from firewall/hardware to SaaS/cloud than its firewall peers, and is a market leader in several strong secular growth areas. The firm believes, relative to large-cap peers, an opportunity to see stronger growth given security budgets continuing to outpace overall IT budgets and for its valuation discount to close with further success transitioning to cloud and annual billings.

Cyberark, on the other hand, is KeyBanc’s key SMID-cap idea as it views identity remaining a top priority within security, continued healthy competitive environment in core PAM and improving outlook as a consolidator of identity post recent breach events at Okta (OKTA) and the merger of Ping & ForgeRock. The firm adds that the management team is executing well, and that the model sets up well for beat/raises and profitability to meaningfully improve as it comes out of its subscription transition.

In data/analytics, MongoDB is the firm’s key idea as it sees the company benefiting from an improved public cloud and application development environment, a stable competitive environment, document database to gain share of OLTP and a beneficiary of GenAI moving to the experimentation/production phase. MongoDB holds a small share of the $100B-plus DBMS market, and is the independent leader in the faster-growing, non-relational segment of that market, KeyBanc notes.

With public cloud growth showing signs of and generative AI both catalyzing faster application development cycles and driving usage of vector search, the firm believes MongoDB is well positioned to benefit from net new workloads in the cloud. Despite a run-up in share price in 2023, KeyBanc thinks a premium valuation is justified given the company’s position as the leading independent NoSQL vendor in a large addressable market.