These stocks have mostly doubled but are still the sweet spot: Bank of America

A good example of this is cybersecurity. And although the sector will have a banner year in 2023 — with leading cyber stocks doubling on average — it “is still the sweet spot,” according to Bank of America.

“Cybersecurity is a highly defensible area of ​​IT spending and should remain a key secular theme for technology and software investors in 2024, especially as enterprise security budgets should increase over the coming year,” says a team of Bank of America analysts led by Tal Liani. “The next ten months.”

Frankly, improving network security is something companies feel they have to do, even during cyclical downturns. Explaining why you didn't do so after a data breach or malware attack is not good for the C-suite. Hence the responses received by Bank of America shown in the pie chart below.

Another growth trend in cybersecurity is the consolidation of products and vendors, known as platforms. Bank of America says the average company often has 50 to 70 different cybersecurity solutions, bundled together as the organization grows, many of which provide overlapping functionality.

“[S]“As companies have come under pressure to tighten IT spending while maintaining network security, the value proposition of platforming, or using a platform vendor rather than multiple products, has become increasingly prevalent,” Bank of America says.

Companies that offer cybersecurity products via a single platform and have already benefited from this trend include Fortinet FTNT,
Palo Alto Networks PANW,
Crowd Strike CRWD,
And Microsoft MSFT,
According to Bank of America, though, the team maintains that some of the hype around the platforms is overblown.

In fact, the company accepts that although net spending on cybersecurity will increase, the sector is not completely immune to finance departments' focus on cutting costs as economies slow.

“Weak macro conditions lead to longer sales cycles, increased scrutiny of purchases, and reduced deal durations,” Bank of America says.

However, with many companies also needing to better protect their cloud networks, and the rise in AI-related cyber attacks leading to increased demand for AI-applied cybersecurity, the sector looks fair.

The big problem for investors is that many of the structural winds mentioned above have been identified, pushing cybersecurity stocks higher over the past two years. For example, shares of CrowdStrike, Palo Alto Networks, and Zscaler ZS
Bank of America indicated that they will rise by 147%, 113% and 101%, respectively, in 2023.

For this reason, Bank of America's best buys in this sector are those stocks that have been lagging in valuation but in the bank's opinion still have good growth prospects.

“We highlight Fortinet as a top pick for 2024, as we believe the stock's performance should improve once business momentum improves in the second half of 2024,” Bank of America says. “We also prefer CyberArk CYBR,
Which continues to show strong trading momentum, yet is trading at a discount compared to other successful cybersecurity stocks.

The bank also maintains its Buy rating on CrowdStrike and Zscaler, although it feels it should “highlight increased valuation risks out to 2024”.

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