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CYBERSECURITY, IT INFRASTRUCTURE FIRMS LIKELY TO ESCAPE FEDERAL BUDGET CUT IMPACT

Federal IT departments face budget cuts of about 10% in 2025 and the following years, according to brokerage Rosenblatt, with new projects being delayed and existing ones facing increased scrutiny.

Programs that don't match the new administration's goals, especially diversity and inclusion initiatives, will likely see the biggest cuts, along with wasteful projects, consulting fees, and per-person software licenses. Traditional software installed on local servers is particularly at risk as budgets tighten.

While there would be near-term disruption in IT contracts pipeline and new project demand, the federal IT market requires much modernization and next-generation process automation and could present a significant growth market in the medium to long term, Rosenblatt analysts say.

With security threats persisting globally, cybersecurity is also likely to remain a key priority, the analysts note.

The revamp could present an opportunity for cybersecurity firms like Palo Alto Networks PANW.O, CrowdStrike CRWD.O and Fortinet FTNT.O as well as infrastructure software companies like Datadog DDOG.O and Dynatrace DT.N.

Palo Alto, for instance, is well-positioned to capitalize on the demand for total platform cybersecurity solutions, Rosenblatt says, noting that a majority of the company's business in the federal government is focused on firewalls.

These companies also have diversified revenue sources, with federal spending contributing less than 10% of business, insulating them from a significant near-term hit.

Meanwhile, major consulting firms like Booz Allen BAH.N, Deloitte, and Accenture ACN.N could see steep budget cuts.

(Kritika Lamba)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)