Goldman On Cybersecurity Stocks: Bullish On Palo Alto, Bearish On Cloudflare, Plus More Ratings

Investment banking giant Goldman Sachs Group Inc GS made a major move in the security sector, initiating coverage of several companies with Buy, Neutral and Sell ratings.

The Goldman Analysts: Several Goldman analysts identified favorable industry dynamics for the security sector in an industry initiation note Tuesday, including the rise of multi-product platforms, less cyclical demand and natural extensions for growth for industry incumbents.

The maturing of machine-learning applications was expected to further boost the sector, Goldman Sachs analysts said, and unit economics are outperforming broader software benchmarks.

While demand may be muted in 2023, the investment bank said these longer-term positives are expected to provide a more benign competitive environment, with rising tides lifting many boats.

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The Goldman Buy/Sell Takeaways: On the Buy side, Goldman said Crowdstrike’s core strengths in data collection and monitoring were expected to drive significant growth in the cloud sector. With solid free cash flow generation and a recent revenue revision, analysts found the risk/reward ratio favorable for investment.

For Check Point, the analysts said the company’s increased investments in mergers and acquisitions, research and development, and sales and marketing resources slowed down its loss of market share in the firewall market. Check Point’s position in the market improved, thanks to the Infinity platform, which enabled consolidated management of threat vectors.

Fortinet’s founding thesis on the convergence of networking and security was being realized through network transformation and the adoption of Secure Access Service Edge (SASE), Goldman said. Despite the need for more investment in its cloud portfolio, Fortinet's leadership in SD-WAN technology positioned it for growth in the SASE market.

The analysts said Palo Alto lead the way in implementing a multi-platform strategy with technology excellence in various product areas. The company's network, endpoint and cloud products, each benefiting from centralized domain expertise in UIUX, marketing, security intelligence and machine learning, were at different stages of development.

On the Sell side, the investment bank said its concerns with Cloudflare is that overall growth may normalize after five years, leading to fewer catalysts for the company’s core products, while increased visibility into the revenue mix is needed to ensure success. Further, Goldman said Cloudflare may face stiff competition from hyperscalers, necessitating heavy go-to-market investments to achieve success in Wave 2 and 3 products.

Okta's share gains in identity access management were likely to slow as Microsoft became more competitive and the identity cloud upgrade cycle reached more than 50% of the IAM TAM, the analysts said. Moreover, product cycles in identity governance and privileged access would take longer than expected to make a meaningful revenue contribution.

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