Cybersecurity

Is it a good buy while we wait for Liberation Day?

According to President Trump, April 2nd is supposed to be Liberation Day. However, investors are unlikely to feel liberated by reciprocal tariffs. Even though Trump has taken a more flexible stance lately, we will get some new taxes on trade of unspecified size whether we like it or not. Hence, we have to brace ourselves. We can only hope for less rather than more. In fact, if Trump announces a more measured approach, the market can rally. The question I pose this week is whether we can swim against the tide and buy into a sector that’s in a secular growth trend. We will look into three companies:: Palo Alto Networks, Zscaler, and CrowdStrike.

Trumpcession

Governments can fix a public debt problem in two manners. The most lenient way is to increase economic growth to lessen the share of public debt compared to the overall economy. Austerity is a more strenuous method: cutting public spending and heightening taxes. In reality, there are also two other methods: debt restructuring or default. However, these methods are seldom used unless the debt situation has grown out of control.

The Trump administration has chosen austerity. The problem with this method is that it seldom works. Debt dynamics usually stay the same regardless of how much the government tightens its belt. The economy tends to suffer under austerity, leading to long periods of underutilization and, in some cases, recessions. At the end of austerity programs, governments often learn that debt has grown against the Gross Domestic Product (GDP).

So, before governments go down the austerity road, they must think long and hard about how to proceed without hurting enterprises, workers, and consumers too much. Unfortunately, the Trump administration pursue austerity in the absolute worst manner. The savings so far have been minuscule while simultaneously creating significant economic damage. Consumer confidence is down and there is considerable uncertainty in the business community. For this reason, many economists have put the American economy on recession watch. Since the wounds are self-inflicted, we can call it a Trumpcession.

Investing under recessionary fears is a complex discipline. If investors en masse believe we are going into a recession, the stock market can suddenly drop by 20%. Consequently, we must be careful right now. Can cybersecurity be a sector we can hide out in during this turmoil?

Balancing admiration with valuation

Cybersecurity has one of the strongest growth stories in the market. With AI and cloud driving growth, companies like CrowdStrike, Zscaler, and Palo Alto Networks, are at the forefront of innovation, offering comprehensive digital protection. Cybersecurity is a board-level priority, making them somewhat resilient to economic fluctuations. So, where can we go wrong by joining the leaders in AI-driven threat detection and zero-trust architecture? - Well, these companies can also be overpriced, therefore, we have to check whether future cash flows will give us an acceptable return on the investment. I use a discount factor of 9% in this instance.

Zscaler

ZS leads in Zero Trust and Secure Access Service Edge (SASE) architectures, with AI-powered threat intelligence for real-time risk scoring and automated security policy adjustments. Their Zero Trust Exchange platform serves 8,000+ customers, including 40% of Fortune 500 companies, showcasing strong market adoption.

ZS has grown very fast in the past. In fiscal year 2024, total sales were $2,17B and revenue growth was 34%. Despite this solid growth, ZS hasn’t done much in the stock market lately. Over the last 52 weeks, it has traded between $153 and $218.

ZS cites that it has a total addressable market (TAM) of $100B. So, what is holding the share price back? ZS has only captured a small portion of this market, so the runway for growth is long. Given this dynamic, I assume investors are puzzled by the sudden deceleration in revenue growth. ZS only guides revenues of around 2,65B for fiscal year 25, representing 22% in revenue growth, far below thirtysomething in the last few years. Tougher competition, especially from Palo Alto Networks, might be one of the reasons for the slowdown.

Zscaler is slightly overvalued in my model. The company exhibits a good margin development but due to the deceleration on the top line, I can only give ZS a fair value estimate of $180 per share.

CrowdStrike

CRWD is an endpoint security specialist. Last year, it introduced Charlotte AI Detection Triage, which achieves 98% accuracy in autonomous security alert triage and potentially saves Security Operations Center (SOC) teams over 40 hours per week. CRWD’s Falcon platform leverages machine learning and extensive threat intelligence datasets, positioning it as a crucial partner for organizations facing sophisticated cyber threats.

CRWD is larger than Zscaler and its sales are nearly twice as high. Despite being more mature, CRWD only grows a few percent below Zscaler on the top line. In fiscal year 24, the revenue growth was 29% and the non-GAAP operating margin was 21%. Over the last 52 weeks, CRWD shares have traded between $200 and $456. The wide range has undoubtedly something to do with CRWD’s security failure in the summer of 20024 which caused widespread IT outages and significant disruption to businesses worldwide. The incident occurred when CRWD distributed a faulty configuration update for its Falcon sensor software running on Windows PCs and servers. CRWD bounced back from the incident, and the share price is $363 today.

Just like in the case of Zscaler, it's troubling that CRWD only guides revenue growth of 21% this fiscal year. Naturally, high-growth companies can’t grow at the same rate forever, which must be reflected in valuations, but this is a significant deceleration from one year to the next. Due to slowing growth, I find CRWD massively overvalued. My fair value estimate comes in at $270.

Palo Alto Networks

PANW is a unified data security platform. Last year, PANW offered integrated AI-powered analysis across code development, cloud environments, and SOCs. PANW’s Precision AI technologies deliver accurate threat detection and swift response, minimizing false positives and enhancing overall security effectiveness.

Last year, PANW changed its business model to pursue an aggressive platformization and vendor consolidation strategy. Sales struggled in the immediate aftermath of this pivot but revenues recovered later, and sales growth has returned to its former trajectory. Presently, PANW’s revenue growth hovers around 15%, and Wall Street analysts believe growth rates will stay at this pace some years down the line. As a result, PANW’s share price has stabilized below $200 this year. Over the last 52 weeks, the share price has traded between $132 and $209. The share price is $182 today.

In my DCF model, PANW comes in as slightly overvalued. My fair value estimate is $155 for the share price.

Final thoughts

All the aforementioned companies exhibit high volatility. Their share prices fluctuate in wide trading ranges. Currently, they are all trading in the upper band of their 52-week ranges.

Although Cybersecurity is a sector expected to grow by a compounded average growth rate (CAGR) above 10%, the strong macro trend doesn’t create any guarantees for individual companies to grow at a fantastic rate forever. Both CrowdStrike and Zscaler are reducing their throttle fast.

We also see that none of them are particularly cheap. Given that these companies trade in wide ranges, it is likely to assume that a better buying opportunity will open up somewhere in the future.

Macroeconomic conditions strengthen a wait-and-see attitude. While we stay on Trumpcession watch, there is no immediate hurry to step into names that have been very volatile over the last 52 weeks.

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The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.

The author is a retail investor, not a licensed advisor. Due to changing market conditions, content accuracy isn't guaranteed. All investments have risks, including the potential loss of principal. Assess your risk tolerance and goals before investing; diversification is key to managing risk.

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