MS 'pounds the table' on Palo Alto Networks, says Okta, others 'look attractive'
Michael Vi

Investment firm Morgan Stanley noted that cyber security companies may not be "immune" to a global economic slowdown like other areas of IT spending, but they are "relatively more defensible" and larger companies, such as Palo Alto Networks (NASDAQ:PANW), may see less of an impact than others.
A group of analysts, led by Hamza Fodderwala, noted that the biggest cuts came from companies such as Varonis Systems (VRNS) and Rapid7 (RPD), while the "best" third-quarter results have come from those like CyberArk (CYBR) and Check Point Software (CHKP), which have high exposure to Europe, the Middle East and Africa, despite concerns about a recession in Europe.
"The biggest estimate cuts in [the third-quarter] were from smaller companies selling predominantly point products, in our view," the analysts wrote. "This aligns with our general preference for leaning into consolidators, most of which are reporting off-calendar [such as] Palo Alto Networks (PANW) and CrowdStrike (NASDAQ:CRWD)."
The analysts added that companies that are able to show profitability are being rewarded, with growth likely to be slower next year than this year. The analysts added that there are several companies that could pivot to profitability, notably SentinelOne (NYSE:S), which the analysts said could see a "re-rating" if the company were to target breakeven free cash flow within the next year.
They added that Palo Alto Networks (PANW) is the firm's top pick, given its attractive valuation and the fact that free cash flow is growing at more than 30%.
For Okta (NASDAQ:OKTA), the analysts noted the stock is "likely nearing a bottom at 3.5X EV/[calendar year 2023 revenues] (2.8X on [calendar year 2024]) on our below consensus forecasts and could potentially re-rate on constructive margin commentary/outlook on their Analyst Day this week."
Late last month, investment firm Cantor started coverage on Palo Alto Networks (PANW) with an overweight rating.