BMO Weighs In On Cybersecurity, Upgrades Palo Alto

The network firewall market will continue to grow at a healthy rate over the coming years, but BMO likes Palo Alto Networks Inc PANW over Fortinet Inc FTNT right now.

The Analyst

BMO Capital Markets' Keith Bachman upgraded Palo Alto from Market Perform to Outperform with a price target lifted from $205 to $240.

The firm downgraded Fortinet from Outperform to Market Perform with a price target lowered from $90 to $78.

The Thesis

Both Palo Alto and Fortinet will continue taking advantage of the growing network firewall market as enterprises will continue refreshing their systems, Bachman said in the research reports. A typical firewall system is refreshed every four to five years with the last major upgrade cycle occurring mostly in 2014 and 2015.

Despite expectations for both Palo Alto and Fortinet to gain market share in the coming years, between the two names only Palo Alto is considered a "feature and brand leader" in platform architecture, the analyst wrote. Specifically, Palo Alto offers customers a prevention focused platform instead of detection which should help the company sustain subscriptions growth at a better rate compared to Fortinet.

Fortinet has shown a notable improvement in its products and services after the FortiOS 6.0 platform offers better integration and automation of security operations. As such, BMO's downgrade from a bullish stance isn't meant to be seen as bearish but an indication the risk-reward profile for Palo Alto's stock is more favorable.

Cybersecurity investors have a "lower risk tolerance" and Fortinet's stock is trading at a balanced risk-reward as the firm's revised $78 price target implies an in-line multiple of roughly 15 to 16 times normalized FCF on 2020 estimates. On the other hand, Palo Alto's stock is trading at around 14 times estimated EV/2020 FCF, which is attractive considering expectations for a superior growth profile over the coming years.

Price Action

Shares of Palo Alto Networks were trading at $202.90 Tuesday afternoon, while shares of Fortinet were down 1.6 percent at $69.36.

Related Links:

Analysts Largely Bullish On Palo Alto After Q1 Print

Goldman Sachs Downgrades Fortinet To Sell