Goldman Is Buying In To Cybersecurity's Growth

Goldman Sachs’ Gabriela Borges launched coverage on Security with an Attractive view. She said that chances of spending growth stabilizing or reaccelerating in 2017 were high, and this could be a good time to buy stocks.

Analyst Gabriela Borges mentioned the following factors that support the expectation of spending growth stabilizing or reaccelerating in 2017:

1. An analysis of 15 years of security spending trends suggests that spending has 3-5-year growth cycles, with phases of accelerating spending, decelerating growth and digestion. With 2015 and 2016 being a digestion period, “this slowdown is now well understood.” Deceleration periods have historically lasted merely a couple of years, and the group is likely to maintain or accelerate growth rates in 2017
2. There are 3 cyclical drivers for spending growth: fear, innovation and corporate profits.

Security stocks are currently trading at the low end of their historical ranges, Borges said, while adding that there were catalysts like the number and intensity of 2016 breaches, improving FCF following investments in 2015 and a resumption in M&A given the low valuations.

“We favor share gainers in network security, strong cash returns, and valuation dislocations vs. growth and history,” the analyst wrote.

Fortinet: Stock Clouded By Misperceptions

Borges initiated coverage of Fortinet Inc FTNT with a Buy rating and a price target of $39. The analyst added Fortinet to the Conviction List, and said that the market seems to be undervaluing the company’s fundamentals, in terms of share gains and cash returns.

Fortinet’s shares are currently trading at a discount of around 40 percent versus peers. The stock is likely to approach more to normalized valuation levels, backed by the company’s stable business fundamentals and improving FCF, Borges stated.

CyberArk: Strong Track Record With Returns

Goldman Sachs initiated coverage of Cyberark Software Ltd CYBR with a Buy rating and a price target of $51. The price target suggests 23 percent upside. The analyst said that the market seems to be underestimating CyberArk’s “runway in privileged access management (PAM, protects IT admin accounts) as a function of greenfield deployments, expansion with its core password product in existing accounts, and upsell opportunity to a broader set of products over time.”

Palo Alto: Market Share Gains Ahead, With Optionality Around New Markets

Borges initiated coverage of Palo Alto Networks Inc PANW with a Buy rating and a price target of $191. The price target suggests 23 percent upside. While Palo Alto’s medium-term growth story is well understood, its “growth-adjusted valuation is compelling given the significant runway ahead both in network security and in new markets,” the analyst commented.

Check Point: More Opportunity In Other Names

The analyst initiated coverage of Check Point Software Technologies Ltd. CHKP with a Neutral rating and a price target of $97. She believes the company is poised to outperform the broader group in the long term, given its “large installed base, significantly stronger profitability, consistent execution, and software blade subscription model.”

Borges added, however, that there is “more opportunity in other names over the next 12 months,” since Goldman Sachs’ Buy rated stocks had underperformed Check Point by 36 percent since June 2015, while Check Point had outperformed the security group by 16 percent year-to-date.

FireEye: Business Undergoing Transformation

Borges initiated coverage of FireEye Inc FEYE with a Neutral rating and a price target of $20. The price target suggests only 9 percent upside.

FireEye has 10 product lines over $10 mn, and seems to be “in the early innings of transforming its business to a services model under its FireEye as a Service (FaaS) platform,” the analyst wrote, while adding that the company’s fundamentals may be volatile in the medium term.

Proofpoint: Stock Fully Valued

Goldman Sachs initiated coverage of Proofpoint Inc PFPT with a Neutral rating and a price target of $58. The price target suggests only 9 percent upside.

“Proofpoint has best-in-class SaaS email technology driven by a big data analytics platform and complementary “TAP” product (targeted attack protection for advanced threats),” Borges said. She added, however, that there seems to be increasing competition in core email and targeted attack protection, with incumbents launching updated product portfolios.

Symantec: Year Of Transition

Borges initiated coverage of Symantec Corporation SYMC with a Neutral rating and a price target of $20. She believes the risk/reward is balanced at current levels.

The analyst expects 2016 to be a year of transition for the company, given next-gen endpoint cycle and cost restructuring. She added, “We believe the next year will be one of significant opportunity but also risk, given disruptive changes at both the company and industry level.”