Given the multiplicity and increasing sophistication of cyber attacks, it is not surprising that data security remains a top business priority. In fact, according to analysts at Jefferies, security is the “clearly defined number one priority” and security spending “should continue to rise as a [percentage] of you [spending].”
However, at last week’s RSA Conference in San Francisco, analysts noted that buyers are adding layers of scrutiny to security purchases, right down to CFO approval. This has been extending the buying cycle, but has yet to result in “any slowdown or deterioration in the closing rate.”
In a research note for investors, Joseph Gallo, an equity associate at Jefferies, and Brent Thill, an analyst, wrote that in the current macro environment, they believe the best mix of solutions will be those that are “consolidators of spending and software delivery. Cybersecurity vendors showing “early signs” of the effects of the macroeconomy have shorter sales cycles and greater exposure to small and medium-sized businesses.
Microsoft Corp. (NASDAQ: MSFT) has a Jefferies Buy rating and a $320 price target. The shares traded around $244.00 early Tuesday, implying 31.1% upside potential from the target price. Jefferies’ price target is lower than the median ($356.35) and average ($359.14) of the targets.
In his comments, Gallo notes that the Redmond giant has 8,500 employees working on cybersecurity issues and plans to spend an average of $4 billion a year over the next five years on the effort. Microsoft wants to be a “holistic” provider of security software with a single solution for Amazon’s AWS and Google’s GCP and its own Azure cloud. Gallo also noted that Microsoft’s valuation is 22 times estimated 2023 earnings per share (EPS), compared to a large-cap peer median of 30 times estimated EPS.
Jefferies has a hold rating on SentinelOne Inc. (NYSE: S) with a $25 price target. At a share price of around $21.90, the implied gain is 14.2%. As was the case with Microsoft, Jefferies’ price target is lower than the median ($33.50) and average ($35.72) price targets.
Analyst Brent Thill commented that SentinelOne told the conference that it believes it is well positioned to “consolidate spending in a more efficient and highly effective way.” While demand for cloud and identity services is strong, the company expects the cloud business to be the strongest driver of the business in the near term. The shares are trading at eight times the estimated enterprise value to sales ratio by 2023. Thill also notes that management is changing its focus and charting a course toward a breakeven year in 2025.
Check Point Software Technologies
Check Point Software Technologies Ltd. (NASDAQ: CHKP) is also Hold rated by Jefferies. The share’s target price is $130, implying an upside of around 6.5% based on a recent trading price of around $122.10. Jefferies is also setting his Check Point targets lower than the median ($142.50) and the average ($139.27).
Gallo notes that Check Point remains focused on growing revenue and management sees the company’s free cash flow/margin profile “as a weapon to invest in during any downturn.” The stock is trading at five times its estimated enterprise value to sales ratio by 2023 and 10 times its estimated enterprise value to free cash flow ratio by 2023.
Elastic NV (NYSE:ESTC) has a hold rating on Jefferies, with a price target of $65. The shares were trading at around $63.00, implying a 3.2% upside. The Jefferies price target is well below the median target of $100.00 and the median target of $99.06.
The company, best known for its Elastic Stack for searching structured and unstructured databases, has just released a preview version of Elastic Security for Cloud, an extension of its Elastic Security program that aims to integrate cloud security into one platform. solution that eliminates the cost of deploying, managing, and integrating disparate security tools. Thill notes that the stock is trading at five times estimated EPS for 2023, below the 6.5 times average for all mid-caps.
In addition to these four cybersecurity firms, the analysts’ “recommended cyber basket” includes CrowdStrike, Palo Alto Networks and Varonis. All three have a purchase rating.