Palo Alto top cyber security pick at MS as sector should see strength from rising tensions
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As geopolitical tensions rise and cyber attacks become increasingly common, the cyber security sector has "rock solid" fundamentals and it should outperform for a number of reasons, with Palo Alto Networks (NASDAQ:PANW) being the top pick at Morgan Stanley.
Analyst Hamza Fodderwala, who has an outperform rating on Palo Alto, noted that the recent fourth-quarter results from roughly 80% of the companies in the sector saw "accelerating" topline growth in the fourth-quarter, while their initial outlooks for 2022 were "all well ahead of consensus and indicate strong pipelines."
"We think strong security demand should remain durable through '22 and, as a result, security stocks provide better opportunities for relative outperformance vs broader software for 3 key reasons," Fodderwala wrote, adding that rising threats, an increase in defensible budgets and more favorable valuations in the space are likely to help support shares.
In addition to making Palo Alto the firms top pick, small to mid-cap stocks like SailPoint Technologies (NYSE:SAIL), KnowBe4 (NASDAQ:KNBE) and ForgeRock (NYSE:FORG) look oversold.
All four stocks were higher in premarket trading, led by a 2% gain in SailPoint.
As the tensions over Russia's invasion of Ukraine continue to boil, the firm noted that the community is now on "high alert," based on recent conversations.
"The Cybersecurity & Infrastructure Agency recently issued a "shields up" advisory to private sector organizations with guidance on how to be better protected against potential state-sponsored cyberattacks," Fodderwala added. "We think there's likely upward pressure on federal cyber budgets (currently penciled in at ~$20B in FY22)."
Earlier this month, J.P. Morgan said Palo Alto Networks is "well positioned to compete for the cloud security opportunity."