Given the multiplicity and increasing sophistication of cyberattacks, it is no surprise that data security remains a top priority of enterprises. In fact, according to Jefferies analysts, security is the “clear-cut #1 priority” and spending on security “should continue to rise as a [percentage] of IT [spending].”
At last week’s RSA Conference in San Francisco, however, the analysts noted that buyers are adding layers of scrutiny to security purchases, up to including chief financial officer sign-off. This has been stretching out the buying cycle but has not yet resulted in “any slowdown or close rate deterioration.”
In a research note to investors, Jefferies’s equity associate Joseph Gallo and analyst Brent Thill wrote that, in the current macroeconomic environment, they believe the best solution combination will be those that are “consolidators of spend & software delivered.” Cybersecurity vendors showing “early signs” of effects from the macroeconomy have shorter sales cycles and more exposure to small and medium businesses.
Microsoft Corp. (NASDAQ: MSFT) has a Buy rating from Jefferies and a price target of $320. Shares traded at around $244.00 early Tuesday, implying an upside potential of 31.1% to the target price. Jefferies’s price target is lower than both the median ($356.35) and the average ($359.14) targets.
In his comments, Gallo notes that the Redmond giant has 8,500 employees working on cybersecurity issues and plans to invest an average of $4 billion annually for the next five years in the effort. Microsoft wants to be a “holistic” supplier of security software with a single solution for Amazon’s AWS and Google’s GCP and its own Azure cloud. Gallo also noted that Microsoft’s valuation is 22 times estimated 2023 earnings per share (EPS), compared with a large-cap peer median of 30 times estimated EPS.
Jefferies has a Hold rating on SentinelOne Inc. (NYSE: S) with a price target of $25. At a share price of around $21.90, the implied gain is 14.2%. As was the case with Microsoft, the Jefferies price target is lower than both the median ($33.50) and average ($35.72) price targets.
Analyst Brent Thill commented that SentinelOne said at the conference that it believes it is well-positioned to “consolidate spend in a more efficient and high efficacy manner.” While demand for both cloud and identity services is strong, the company expects the cloud business to be the stronger driver of business in the near term. Shares trade at eight times the estimated enterprise value to sales ratio for 2023. Thill also notes that management is changing its focus and is charting a course to a breakeven year in 2025.
Check Point Software Technologies
Check Point Software Technologies Ltd. (NASDAQ: CHKP) is also rated at Hold by Jefferies. The stock’s price target is $130, which implies upside of about 6.5% based on a recent trading price of around $122.10. Jefferies is also setting its targets on Check Point lower than both the median ($142.50) and the average ($139.27).
Gallo notes that Check Point remains focused on growing revenue and management views the company’s margin/free cash flow profile “as a weapon to invest through any downturn.” The stock trades at five times its estimated enterprise value to sales ratio for 2023 and 10 times its enterprise value to free cash flow ratio for 2023.
Elastic N.V. (NYSE: ESTC) has a Hold rating from Jefferies, with a price target of $65. Shares were trading at around $63.00, implying an upside of 3.2%. Jefferies’s price target is well below the $100.00 median target and the $99.06 average target.
The company, best known for its Elastic Stack for searching both structured and unstructured databases, has just released a preliminary version of Elastic Security for Cloud, an extension of its Elastic Security program that is intended to integrate cloud security into a unified platform that eliminates the costs of deploying, managing and integrating disparate security tools. Thill notes that the stock trades at five times estimated 2023 EPS, below the average of 6.5 times for all mid-cap firms.
In addition to these four cybersecurity firms, the analysts’ “recommended cyber basket” includes CrowdStrike, Palo Alto Networks and Varonis. All three have a Buy rating.
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