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A cyber breach at Okta , cyberattacks at casino giants MGM Resorts and Caesars Entertainment and an email hack at Microsoft . Cyberattacks may not be new, but experts say some crimes are growing in sophistication as new artificial intelligence tools emerge, and that’s forcing companies to reconsider how they approach cybersecurity spending. “This is not your old father’s enterprise security threat profile,” said Ted Mortonson , technology desk sector strategist at Baird. “As we move to cloud and generative AI, it opens up massive total addressable markets, where security just has to be done a different way.” While a headache for companies, an uptick in cyberattacks coupled with emerging AI tools, may prove a boon for some of the world’s biggest cybersecurity players, helping providers beef up their offerings on the one hand, and boost revenue as firms hunt for all-in-one solutions on the other. CRWD YTD mountain Crowdstrike shares year to date Key players in the space have already begun reaping the benefits of stronger demand. Palo Alto Networks and CrowdStrike have already surged more than 25% each only six weeks into the new year after proving among the best performers in the Nasdaq-100 in 2023. As this next stage unfolds, portfolio managers and investors view these large players as the best-positioned names to reap rewards thanks to their size, scale and resources. To be sure, opportunities abound across the software space, with Wall Street bullish on several popular names in the sector. But arguably, companies offering all-in-one solutions to mounting cybersecurity threats are viewed as sitting in the most advantageous position. “It’s a game of scale,” Mortonson explained, noting that data and security solutions and generative AI infrastructures require a tremendous amount of internal free cash flow and research and development spending many smaller companies lack. “That’s how you get products to market that are next generation.” In a note to clients last month, Bernstein’s Peter Weed initiated coverage of both companies with outperform ratings, citing leadership positions within firewall and endpoint markets and “established sticky enterprise customer base for up-/cross-sell.” PANW YTD mountain Palo Alto Networks in 2024. And Bernstein isn’t the only firm finding cybersecurity stocks attractive lately. Last month, Morgan Stanley analyst Hamza Fodderwala called Palo Alto Networks the investment bank’s top pick in the sector, poised to benefit from rising demand for cyber protection and AI-driven security automation solutions. “Cybersecurity remains a top IT priority in 2024 as rising threats, GenAI adoption and new regulatory requirements should bolster spending,” he said. “PANW remains the leading security platform consolidator by a wide margin, with share gain across multiple categories.” Meanwhile, Crowdstrike’s endpoint security leadership puts it in a prime position to prosper from efforts to identify early threats in consumer devices, laptops and phones serving as entry points for hackers, said Hendi Susanto, a portfolio manager at Gamco Investors. This leading position is one reason Deepwater Asset Management’s Doug Clinton retains a stake in Crowdstrike, along with Palo Alto Networks, in the core fund that he manages. “Scale matters in this overall fight against AI being a tool used for cyber-attacks,” he said. “These companies see the most attacks and can use that data to inform your systems and make them smarter” and better counteract attacks. Although CrowdStrike looks expensive, last trading at a forward price-to-earnings ratio of 85, many on Wall Street view the steep valuation as warranted. In fact, JPMorgan’s Brian Essex highlighted in a recent note to clients that CrowdStrike trades roughly in-line with peers when looked at on a growth adjusted basis, adding that “fundamentals could push the stock meaningfully higher over the next few years,” past a $100 billion market capitalization, up from today’s market cap of $77 billion. “With high incremental gross margins and best in class unit economics, CRWD has some of the best underlying operating and cash flow margin potential within our coverage universe,” Essex wrote. “And while we see a favorable setup for growth over the next few years, we think it is the margin story that remains underappreciated …” — CNBC’s Michael Bloom contributed reporting
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