Cybersecurity companies seen as ‘durable’ heading into earnings season

With the earnings season for the second quarter of the year set to soon kick into gear, investors are looking for any signs of strength, or even just stability, in the tech sector as uncertainty over the economy continues to cast a shadow over sentiment on Wall Street.

According to Morgan Stanley analyst Hamza Fodderwala, recent checks with resellers and survey data on the cybersecurity market point to "a durable security demand environment" as well as "defensible budgets" among enterprise customers. Fodderwala added that it appears unlikely that "overall, [any] downside for forward estimates remains unlikely."

Among the companies that Fodderwala says are set up for "favorable" quarterly results is CyberArk (NASDAQ:CYBR), due to customers having more demand for the its privileged access management software. Fodderwala said that growing adoption of software-as-a-service [SaaS] and investments from customers "have also made CyberArk's (CYBR) offerings more accessible and easier to deploy."

Fodderwala said that as CyberArk (CYBR) completes its transition to subscription-based offerings, he expects the company's management to raise its full-year revenue outlook and show more strength heading into 2023. Fodderwala has an outperform rating on CyberArk's (CYBR) shares.

Fodderwala also said he sees a "favorable" setup on the horizon for Rapid7 (NASDAQ:RPD). The cloud-based security technology company specializes in software and services that mid-market-sized businesses use to assess and manages risks to their network security systems. Fodderwala said Rapid7 (RPD) is in a position to benefit in the near term from its mid-market customer base showing "a higher propensity to consolidate security spend[ing]."

However, not everything is expected to come up roses for all cybersecurity companies in the next round of earnings reports.

Fodderwala remains "cautious" about what Check Point Software (NASDAQ:CHKP) will say with its second-quarter results given what he said were "difficult competitive dynamics" involving factors such as the company's exposure to business in Europe, which makes up more than 40% of Check Point's (CHKP) revenue.

"Current billings is the primary metric for Check Point," Fodderwala said. With analysts expecting Check Point's (CHKP) billings to grow 7.7% from a year ago, Fodderwala said such an increase could be at risk due to "lackluster [customer] checks and potentially slower growth in Europe." Fodderwala has an underweight rating on Check Point's (CHKP) stock.

Fodderwala also has an underweight rating on Qualys (NASDAQ:QLYS), which he said has been dealing with "competitive pressures" in its core vulnerability management business. Billings for Qualys' (QLYS) second are forecast to grow 13.7% from a year ago, but Fodderwala says those results could come in below expectations as the company faces its toughest year-over-year comparisons for its fiscal year.

Additionally, Fodderwala said that with Qualys (QLYS) counting about 23% of its sales coming from Europe, and its partners stretching out sales cycles, the company may end up cutting billings forecasts for the rest of the year.

Among other cybersecurity companies, Palo Alto Networks (PANW) got some praise from BMO Capital Markets analyst Keith Bachmann, who on Friday raised his price target on the company's stock to $650 a share from $615. Bachmann said Palo Alto's (PANW) shares could hit as high as $745 due to a strong mix of software sales and billings growth.

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