By Bill Alpert

Artificial intelligence has delivered a jolt to the computer industry. It is also empowering cyberattacks. That is an opportunity for cybersecurity companies, says BNP Paribas.

On Tuesday, analyst Andrew DeGasperi and his colleagues at the European bank launched coverage on a bunch of cybersecurity stocks. They are bullish on Palo Alto Networks, but neutral on CrowdStrike Holdings, Zscaler and Dynatrace. And they think the widely liked Cloudflare is overvalued, and could fall 20%.

"The battle in cybersecurity is asymmetric and right now the 'baddies' are winning thanks to AI," writes DeGasperi. That makes security software mission critical and resistant to budget cuts, he says. Publicly-held customers want to avoid attacks, which they must disclose under U.S. securities regulations.

Palo Alto Networks is BNP Paribas's top pick in cybersecurity. The stock isn't exactly undiscovered. Dozens of analysts follow it and most rate it a Buy. DeGasperi nevertheless sees 15% upside, from the stock's current price of $354.

From its start as a vendor of firewalls for networks, Palo Alto has added many security products to its platform. DeGasperi says more than 20 are top-rated within the industry. As customers consolidate vendors, he thinks Palo Alto can continue to gain market share and maintain its 38% free cash flow margins by cross-selling products.

Those generous margins make the stock's valuation, with the price at 80 times earnings per share, less daunting. DeGasperi's target price of $410 is 38 times his estimate of free cash flow for calendar year 2025.

BNP Paribas rates CrowdStrike, Zscaler and Dynatrace at Hold because of anticipated obstacles to growth at the companies. Zscaler and Dynatrace are revamping their sales strategies under new leadership, while CrowdStrike may take longer to make sales, after it crashed customers' computers with a faulty software upgrade in July.

DeGasperi has a Sell rating on Cloudflare. Rising cloud traffic has strengthened the company's franchise in securing cloud computing networks. But at 14 times the per-share revenue expected for next year, Cloudflare stock has gotten expensive. The sales multiple implies that revenue will continue growing at a 30% annual clip. DeGasperi thinks that is a stretch, especially in light of recent changes in Cloudflare's leadership.

Cloudflare's strategy involves hosting the cloud activities of customers. That requires capital spending and will pinch the company's free cash flow down to just half a percent of Cloudflare's valuation, he argues.

Believing that 11 times revenue is a more reasonable multiple for Cloudflare stock, the BNP Paribas analyst thinks the stock could drop 20% from its current level of $81, to a price of $65.

Write to Bill Alpert at william.alpert@barrons.com

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October 08, 2024 16:38 ET (20:38 GMT)

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