Cybersecurity firms have ‘clear green light’ heading into Q3 earnings

Palo Alto Networks (NASDAQ:PANW), Fortinet (NASDAQ:FTNT) and several other cybersecurity companies look to have a "clear green light" going into third-quarter earnings, investment firm Wedbush Securities said this week.

Analyst Dan Ives noted that checks for the September quarter were "strong" as deal flow continued to hold up despite the uncertain macro economy.

"We believe federal deal flow in [the third-quarter] was a clear standout as more government agencies are laser focused on protecting data, endpoints, [and] infrastructure in an increasing dangerous cyber environment with threats increasing by the day," Ives wrote in a note to clients. Ives has an outperform rating and a $200-a-share price target on Palo Alto Networks (PANW) after the company recently enacted a three-for-one stock split.

Ives added that there appears to be more of a focus on moving to zero-trust architecture, which is likely to "disproportionately" benefit companies such as Zscaler (NASDAQ:ZS) and Crowdstrike (NASDAQ:CRWD) amid increased federal spending and the continued push to the cloud.

Ives added that federal cyber security tracking for 2022 looks to be up between 20% and 25% from 2021, and 2023 is expected to be more of the same, especially in light of "high profile" attacks that appear to be accelerating.

"Overall quarter-end checks were particularly solid for the likes of Tenable (TENB), Fortinet (FTNT), CyberArk (CYBR), Palo Alto Networks (PANW) and Zscaler (ZS) as deal activity for each of these vendors appeared to track ahead of our expectations in the field despite the negative market noise being baked into these names," Ives explained.

In addition, Ives noted that Check Point Software (CHKP) likely had a "relatively firm" third-quarter, despite a softer spending environment in Europe as its deal pipeline going into the fourth-quarter was "solid."

With Russia continuing with its war on Ukraine on all fronts, including cyber attacks, more employees continuing to work from home and the recent Russian and Chinese-linked propaganda networks that were taken down by Meta Platforms (META), the outlook for cybersecurity spending has never been higher, Ives said.

Specifically, areas such as identity threat detection, privileged access management, endpoint and vulnerability security and the continued shift to zero-trust software are likely to see further momentum.

Despite the optimism surrounding the quarter, not everything is looking postitve, Ives admitted. Aside from the aforementioned issues in Europe, there are all signs that small and medium-sized businesses are slowing cybersecurity deals, as ongoing economic weakness hits companies differently.

Nonetheless, Ives noted that the strength in the U.S. is "more than enough" to make up for any weakness in other areas, especially with most security companies ahead of their own targets between 3% and 5% as of the third-quarter, despite the ongoing global uncertainties.

Last month, it was reported that Palo Alto Networks (PANW) was nearing a deal to acquire Israeli cybersecurity startup Apiiro for approximately $600M.

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