2023 was a great year for software and cybersecurity stocks, as well as the technology sector in general. With inflation appearing to be cooling and a recent rally in the S&P 500 (^GSPC), could these stocks continue to see a bright side for 2024? Barclays Senior Analyst Saket Kalia sat down with Yahoo Finance Anchor Seana Smith at the Barclays Global Technology Conference to discuss the outlook for software and cybersecurity stocks in the next fiscal year.
Based on the presentations he witnessed, Kalia describes how the environment is approaching next year: “The situation in the cybersecurity areas is quite stable and I think the assumptions for Q4 are not that strong.”
Watch the video above to hear Kalia’s three opportunities for growth in cybersecurity and its top stock picks.
For more expert insights and the latest market moves, watch this entire episode of Yahoo Finance Live by clicking here.
video transcript
Welcome back to Yahoo Finance 2023 was indeed an outperforming year for many of these software and cybersecurity names, with names like CrowdStrike alchemy and Sentinel 1 outperforming, but are there more areas of work, a word or two about We want to bring in someone who knows we have saket kalia he’s a Barclays US Senior analyst covering mid and small market software Zach, it’s great to see you here. It’s great to be here Seana Thank you so you’ve spent the last day or two actually talking to CEOs, what do you think of those conversations to find out how investors are feeling ahead of 2024? I can say that the environment feels a bit. We’re a little bit more stable when we look at security areas like endpoint security; For example, we’ve had really good results from people like Sentinel One, we’ve also had really good results from more diverse businesses like CrowdStrike. It also feels very stable in cyber security areas. And I think the assumptions for Q4 are not that Herculean, so I felt pretty good coming out of the presentations yesterday on the security side and what are some of those growth opportunities, what do they look like more specifically as you look beyond Q4 and into 2024? you know for sure, I think there were three issues that were discussed across multiple companies yesterday. The first of these is this saucy trend, which is the secure access service edge, it’s really a new architecture for network security. You’ll see companies like Zscaler and some private companies playing here as well. I think the second one is Cloud security, meaning it actually protects workloads in the public cloud; In addition to names like CrowdStrike and Sentinel 1 that do great work in this field, there are also some private companies. And I think the third one is really a security data lake idea, so you’re seeing a big merger and acquisition with Cisco acquiring Splunk. I think there are some competitors who see some equity gains opportunity there, I think those are the three trends we’re hearing about. What are some of our competitors from a few of our security companies that you’ve identified as an opportunity for share gains? Yeah, I think you’re hearing names like CrowdStrike and Sentinel 1 talking about how they could really potentially disrupt this area in Sim you. There are companies competing in this space, such as Rapid7, as well as some in the private sector. So this is a listen Cisco Splunk is obviously going to be a very powerful combination but I think when you look at the better performance of some of them there are some people who want to reimagine this space with maybe a slightly more lightweight solution. I listed some of these names above. But let’s talk specifically about CrowdStrike because when you look at that name, it’s a stock that’s up over 130% since the beginning of the year, and that kind of outperformance is enough to see that momentum carry over into the new year, as you know. Sean, I actually think there is, and I can see a few reasons why. One, it’s a great growth story in the security space, but it has good free cash flow support, and so looking out over a couple of years, I think this is a company that’s talking about getting to $10 billion in RN. There’s really good support over the next 5 to 7 years. I think the other thing we’ll see from Crowdstrike in ’24 is an increasingly diversified business. And it really reminded me of the Palo Alto networks 18 to 24 months ago, where a lot of that business is really coming from a platformer. And I think investors appreciate that diversification. I think that’s what keeps the CrowdStrike story going on 24, and there’s so much about Zach that I’m really the driving factor here in a lot of the performance we’ve seen from these companies in the last year. What are your best ideas or best moves to capitalize on this momentum as we look to 2024? Yes, you definitely know that I would probably consider three names that I particularly like for next year. So the first one is security within security, but more on the consumer side Gen digital so Gen is in the background as far as the NortonLifeLock plus avast combination, I think you’re just seeing some improvement in net subscriber numbers, which is a 60% operating margin company in terms of earnings over the next couple of years It will actually trade at an acceptable valuation, generating 12% to 15% earnings per share. I think that’s the first name you know, I think the second one is the one we talked about here with CrowdStrike in the diversification play on a good free cash flow support. I think the third name here unfortunately could have been at the conference because they reported yesterday. But as Veeva systems, this is the leader in vertical specialty software for life sciences, and I think that’s their part. I think there’s good free cash flow support, 10% to 15% growth is just a solid, quality business. These are things I’m thinking about for next year, and it looks like there’s a lot of opportunity for optimism as we look at the next few quarters. But in terms of some of the risks, or maybe the ones that investors need to be aware of, as we prepare and they try to understand their portfolios, what are some of the risks that you see, at least that’s what comes to mind right now, I’m sure you know Maybe more in the near term, given the macro budget that we’ve seen in previous years I think there is some debate about whether the amount will be seen this December quarter. If I make this happen by 24, who knows what IT budgets will look like in 24? We will see some stability. But I think this ensures that expectations for improvement in some key metrics, like RN, for example, are actually aligned with next year’s budgets. I think those are some of the things we want to explore as we dive deeper into some great 24. There is advice Carla Thank you so much for your time. Thank you very much for accepting me.