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Some Turn Bearish On Palo Alto, Fortinet And Check Point Even As Cybercrime Endures

CHKP, FTNT, PANW | September 5, 2017

Credit Suisse initiated coverage of cybersecurity stocks Palo Alto Networks Inc (NYSE: PANW), Check Point Software Technologies Ltd. (NASDAQ: CHKP) and Fortinet Inc (NASDAQ: FTNT) with a Negative category view.

The logic for the pessimism? The corporate network has been disintegrating amid the cloud's dominance, and therefore, spending will be redistributed away from the network, impacting firewall vendors. This is despite the firm believing cybersecurity follows a secular growth theme.

Rating/Price Target

Palo Alto Networks: Underperform/$125
Fortinet: Underperform/$33
Checkpoint Software: Neutral/$110

Losing Relevance

Analysts Brad Zelnick, Jobin Matthew and Syed Talha Saleem said both the value of data and the threat of its compromise have been rising. The analysts are of the view that as long as malicious innovation outpaces benevolent, the cybercrime wave will endure, exerting upward pressure on budgets for data defense.

Credit Suisse said, since the cloud is distributed, it dissolves the concept of network perimeter, which was applicable for traditional methods of IT delivery.

"As workloads move out of data centers, it becomes less clear at what point the bounds of the corporate network begin and where they end," the firm added.

Additionally, the firm said the new security paradigm should mirror the cloud compute paradigm, which can be characterized as on-demand, borderless, without hardware, dynamically priced and scalable. With an appliance-based approach failing on each account, the firm expects spending to be redistributed to other controls and cloud-first innovators.

Even if the firewall retains its relevance in the cloud, Credit Suisse believes the space will continue to face multiple structural headwinds such as increasing competition, pricing challenges, the diminishing tailwind of TAM expansion, and the shift in spend from prevention to detection and response.

Imperial Positive On Pal Alto

Meanwhile, in a separate note, Imperial Capital's Michael Kim upgraded shares of Palo Alto Networks to Outperform from In-line and increased his price target from $137 to $165.

The view follows the company reporting better-than-expected fiscal year fourth quarter results. Additionally, the firm noted that sales reorganization has been progressing strongly, with the adoption of new products and subscription services increasing.

Imperial Capital is of the view that Palo Alto remains a top-tier vendor with a proven security platform extending from the network perimeter to endpoints.

"We believe investors could become increasingly constructive on the stock with consistent sales execution and improving visibility from higher mix shift to subscription services and recurring revenue," the firm said.

Also, the firm expects that the recently announced retirement of Chief Financial Officer Steffan Tomlinson should allow for an orderly transition. The firm anticipates further details on the business during the company's upcoming Investor Day scheduled for Sept. 27.