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Some of the cybersecurity sector’s biggest winners this year can keep powering higher, according to a Jefferies analyst who shook up his ratings on a handful of key stocks Thursday.
Jefferies’ Joseph Gallo now has a preference for high-growth cloud-based companies that skew toward enterprise customers and have exposure to federal spending and vendor consolidation, he said in his latest note to clients. Such names can better withstand a “challenged” spending environment, in his view.
While Gallo previously worried that CrowdStrike Holdings Inc.
CRWD,
could face revenue headwinds this year, he now has a more upbeat view of the company’s prospects.
“Our recent field work/vastly improved survey results are indicative that CrowdStrike can meet this ramp and few cyber names feel as well positioned to capture fed, vendor consolidation and cloud tailwinds,” Gallo wrote, as he upgraded CrowdStrike’s stock to buy from hold and hiked his target price to $225 from $170.
He also adopted a rosier view of shares of Zscaler Inc.
ZS,
writing that the company is “best placed for the distributed and cloud-based world.”
Gallo noted that Zscaler is “in the early stages of monetizing” the estimated $60 billion market for cloud-based cybersecurity services, with “upside potential” to estimates in fiscal 2024 expected from the company’s business with the federal government. He upgraded the shares to buy from hold as he boosted his price target to $225 from $170.
Both CrowdStrike and Zscaler shares have outperformed those of Fortinet Inc.
FTNT,
so far this year, and Gallo expects that trend to continue. He lowered his rating on Fortinet’s stock to a hold from a buy and cut his price target to $65 from $85, saying that he expects “at least” several quarters of headwinds for the company, including weak spending from small and medium-sized businesses along with “hardware digestion,” the industry term for oversupply that hampers sales.
In August, Fortinet shares had their worst one-day drop on record after the company had started reporting a large number of delayed deals. A quarter earlier, Cloudflare Inc.
NET,
had also reported delayed deals, and that was thought to be a cautious signal for the broader cybersecurity market. When companies like CrowdStrike and Zscaler appeared unaffected, analysts focused more on individual companies.
For the year to date, CrowdStrike shares are up 75%, Zscaler shares have gained 51%, and Fortinet shares have advanced 19%, compared with a 19% rise from the ETFMG Prime Cyber Security ETF
HACK
over the same period. The S&P 500
SPX
has gained 11% during that span, while the Nasdaq Composite
COMP
has advanced 26%.
