deep fake. clone voice. These are some of the growing threats consumers may face as artificial intelligence takes over the tech world. While a major headache for customers and businesses alike, the emergence of advanced AI attacks could be a huge boon for cloud companies working in the cybersecurity space. Cybersecurity cloud companies have long used AI and machine learning to thwart attacks, monitor suspicious activity, and protect their businesses. But after ChatGPT’s groundbreaking market debut, and as the use cases for generative AI (and the age of chatbots) increase, many companies are looking to build better security to combat more advanced threats. you will need it. This year, many cloud stocks appear to be recovering from last year’s slump as the Federal Reserve’s rate hikes hit earnings potential and future profits. The sector is also getting a boost as bond yields have fallen from their all-time highs. Cybersecurity stocks have surged across the board as investors re-entered the tech sector, with the First Trust NASDAQ Cybersecurity ETF (CIBR) up about 7.5% this year. Many of these stocks are included in the Nasdaq Composite, which is up 15.3% year-to-date. Cybersecurity providers CrowdStrike and Palo Alto Networks are up 25.6% and 38.5%, respectively, year-to-date. Meanwhile, shares of Microsoft, the security software provider and ChatGPT maker and his OpenAI backer, are up 19.2%. And those tailwinds are likely to continue. While this can be problematic for businesses, investors and analysts are voicing a shift from forced cyber upgrades to cloud computing to mitigate emerging AI-focused threats as society pursues innovation. It says computing stocks should benefit. Despite fears of a looming recession and declining IT budgets, these risks should force businesses to prioritize cybersecurity spending, thus isolating the sector. Defiance ETF CEO Sylvia Jablonski said: Despite looming recession fears and cuts in her IT budget to help companies cut costs, Wall Street is uniquely positioned to weather these headwinds while capitalizing on the growth of AI. I think we have cyber security. Despite a surge in stock prices this year, TD Cowen’s Shaur Eyal says valuations and earnings valuations look reasonable for many stocks in the industry. They are also on track for consistent healthy growth rates and offer solid cash flow generation, he said. “Our basket of cloud and cybersecurity stocks offers something for everyone,” Eyal said. “If you’re a value investor, there’s a value play. If you’re a growth investor, there’s a lot of investments out there,” Morgan Stanley’s Hamza Fodderwala said in a recent client report, explaining how economists and investors While many are bracing for a macroeconomic slowdown and a possible recession, he said the sector looks “relatively defensible in uncertain times” as demand appears to be picking up. “Since the beginning of the year, the security demand environment has been much better than feared, with a majority of security companies reporting forward-looking prospects that exceed consensus/buy-side expectations.” Top priority. Most of these stocks were up early in the year, but analysts say they have more upside as the companies focus on margins and show “sustained top-line growth.” I’m watching it. Budget cuts could force companies to shift to fewer vendors, which should benefit “consolidators” Palo Alto Networks and he Fortinet, he said. added. They will be able to “secure more security budgets in a time of heightened scrutiny.” Her JoAnne Feeney of Advisors Capital Management, who finds winners in this space, is betting on Palo Alto Networks. Palo Alto Networks has a strong customer base and the ability to help businesses battle new fronts. The shift to cyber warfare in Ukraine could also provide a tailwind for the sector, she added. “The threat surface is growing, and it will grow as more companies start using generative AI,” said her manager at Portfolio. “We believe cybersecurity is another strong multi-year growth industry because the more companies move to the cloud, the more vulnerable they become.” PANW YTD Mt. Palo Alto Networks So Far This Year Equity research firm Redburn also sees Palo Alto Networks as the clear winner in cybersecurity, as the surge in AI threats creates a “pull-forward” effect on cyber spending at large companies. This should increase the need to invest in companies that are “pioneers” in AI and machine learning, an industry in which Palo Alto Networks has invested, according to the company. depends on For example, Redburn sees CrowdStrike and Microsoft as prime beneficiaries among small businesses. Microsoft’s Performance in 2023 Microsoft’s Performance in 2023 “Humans are the biggest vector for threat actors in the small and medium business (SMB) segment. As we move forward, adoption from SMBs will increase, which is very relevant,” the company said. Along with its cybersecurity products, Microsoft also happens to be a major player in the AI battle among the big tech companies. The company announced a new multi-billion dollar investment in ChatGPT maker OpenAI earlier this year, adding AI to the Bing search engine. Microsoft will face off against long-established AI player Alphabet, which recently launched rival chatbot Bard. Elsewhere, RBC Capital Markets considers Cloudflare one of the “best-positioned” companies in cybersecurity. In his March note, analyst Matt Hedberg cited OpenAI’s move to run parts of its network through Cloudflare as a tailwind, with other his AI providers likely to follow suit. added. Cloudflare is also positioned to offer security his solutions that utilize AI capabilities to thwart threats from “more intelligent chatbots,” he said. Indeed, despite rising share prices, a long-term positive trend, and a bullish Wall Street outlook, many of these stocks are trading at a premium to the S&P 500 on a forward price/earnings basis. . next 12 months. Palo Alto Networks, for example, is well off its PE high, trading at 43x earnings over the next 12 months, while the broader S&P 500 multiple is just below 18x. is higher than CrowdStrike and Fortinet have about 53 and 45 PEs respectively. Overall, Wall Street may be just beginning to recognize the magnitude of the tailwinds for the cybersecurity industry, but one thing is for sure: “You can’t stop spending on cyber,” he said of TD Cowen. says Eyal. “It’s a cat-and-mouse game.” — CNBC’s Michael Bloom contributed to the report
