The software industry experienced a significant market decline, losing approximately $300 billion in value on February 3, 2023. In the wake of this sell-off, cybersecurity stocks have also been affected. However, according to Meta Marshall, a cybersecurity analyst at Morgan Stanley, this presents a crucial opportunity for investors. She emphasizes that advancements in artificial intelligence (AI) are not only expanding the attack surface for cyber threats but also driving a burgeoning market for cybersecurity solutions.
Marshall highlights that the integration of AI technologies into code development and operations is increasing vulnerability. The use of large language models (LLMs) is particularly concerning, as they are susceptible to prompt injection attacks and can inadvertently disclose sensitive information. Furthermore, AI-generated code can introduce unforeseen security flaws that enhance the capabilities of cybercriminals, enabling more sophisticated phishing attempts, data poisoning, and other malicious activities.
As AI becomes increasingly prevalent in various sectors, the need for robust cybersecurity measures is intensifying. Marshall notes, “With 14% of organizations already reporting an AI-related breach and 16% noting that AI was involved in their breaches, this has become an urgent spending priority.” She projects that if security expenditure aligns with general IT spending, the AI security market could exceed $45 billion in the coming years, up from approximately $16 billion today, indicating a compound annual growth rate (CAGR) of 30-40%.
Investment Opportunities in Cybersecurity Stocks
Marshall expresses particular optimism for several cybersecurity companies, starting with CrowdStrike (CRWD). She maintains an equal-weight rating on the stock with a price target of $537. Despite a year-to-date decline of 8.35%, bringing the price to $429.64, the potential upside remains close to 25%. CrowdStrike is scheduled to report earnings on March 3, 2023.
Another notable company is Palo Alto Networks (PANW). Marshall reiterated an overweight rating and set a price target of $245. Currently priced at $166.95, which reflects a decline of 9.36% year to date, the stock has an upside potential of nearly 47%. Palo Alto Networks is set to announce its earnings on February 17, 2023.
Marshall also identifies long-term opportunities in stocks that have underperformed recently. Companies such as Zscaler (ZS), SentinelOne (S), Netskope (NTSK), and SailPoint (SAIL) present attractive entry points for investors.
For Zscaler, Marshall projects an annual recurring revenue (ARR) growth of 24%-25% year over year, despite a 26% quarter-over-quarter seasonal decline. With a current price of $177.72, down 20.99% year to date, the upside potential is impressive at 71%, with earnings expected on February 26, 2023.
Marshall anticipates that SailPoint will exceed consensus estimates, aiming for a total ARR of $1,122 million with a year-over-year growth of 28%. The stock, currently at $15.92 and down 21.3% this year, has a projected upside of 57%.
SentinelOne is also positioned for growth, with Marshall forecasting a 20.2% year-over-year growth in Q4 revenue, exceeding management’s guidance of $271 million. The stock is currently priced at $13.87, down 7.53% year to date, with an upside of approximately 29.7% before its earnings report on March 12, 2023.
Finally, Marshall expects Netskope to achieve an ARR growth exceeding 30% year over year for Q4, driven by improved bookings and retention trends. With a current price of $11.89, down 32.21% year to date, the stock could experience a remarkable upside of 127% before its earnings announcement on March 11, 2023.
In summary, Morgan Stanley’s analysis suggests that the integration of AI into various sectors is reshaping the landscape of cybersecurity investments. While market volatility presents challenges, it also opens doors for strategic investment in companies positioned for growth in a rapidly evolving threat environment.
