UBS Breaksdown The Clouding Cyber Fundamentals

For about three years, cybersecurity spending has been in a “super cycle,” UBS’s Brent Thill said in a report. The analyst added, however, that the 1H16 earnings and “our ongoing field work” indicate that the phase of “indiscriminate budget allocations” may be over.

Takeaways

Thill mentioned that the group’s earnings and channel checks indicate:

• While the share in overall IT spending was growth, the growth magnitudes were normalizing
• Binge buying patterns were rationalizing
• Vendors who had limited scale were being “squeezed out” for bigger platforms
• Weaker linearity substantiating large stage of spending cycle and intensifying competition
• Increase in subscription-oriented consumption of security products, with lower appliance-centric consumption, “with diverging stock performance of appliance-first vs. subscription-first vendors the proofpoint.”

Subscription-Based Consumption

“Appliance fatigue and appetite for software-first architectures have upended most enterprice IT purchasing and cybersecurity is no longer an exception. While the risk of lower product revs is plapably high, this is likely to be felt across the security category, and which we don’t view as a demand depressant nor a vendor specific issue, but an industry-wide phenomenon for bundled software features,” Thill wrote.

Recommendations

The analyst recommended sticking to Symantec Corporation SYMC, Fortinet Inc FTNT and Palo Alto Networks Inc PANW, while commenting that Secureworks Corp SCWX was a defensive play. He termed FireEye Inc FEYE and Check Point Software Technologies Ltd. CHKP as “lukewarm.”

Thill considers Symantec as the best 2H16 stock with limited downside, renewed leadership and strategic direction, Fortinet as a favored mid-cap GARP play with potential activist involvement and Palo Alto as a good long-term company, but likely soft Q3 results and tough comps in the near term.

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