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Expect a Big Year for Security and IT Software. 4 Ways to Play It.

Courtesy DocuSign

Last year ended with a bang for security software stocks, as the still-unfolding SolarWinds “Sunburst” hack spread and investors piled into the sector looking for companies likely to benefit from an expected increase in spending in response.

Piper Sandler analyst Rob Owens reviewed the landscape in a 100-page report on Tuesday, asserting that 2020 events—the pandemic as well as the hack attack—have created a perfect storm of demand for 2021, “paving the way for continued opportunity within the security and infrastructure software segments.”

“While the initial IT response to the global pandemic resulted in significant digital transformation-related security and infrastructure spending, the Sunburst hack served to remind practitioners and investors alike of what is potentially at risk from cyber attack,” Owens writes. “This should lend to a strong spending cycle for some time to come. Looking ahead, we remain bullish on the fundamental backdrop for our sector.”

Owens notes that 19 of 23 stocks he covers rose last year, with eight up triple digits. Owens notes that the average stock he follows rose 78% last year, led by Zscaler (ZS), up 329%, and CrowdStrike Holdings (CRWD), up 325%.

Owens offer a list of five key 2021 security trends:

  • He thinks the response to Sunburst will “catalyze” the market. “The magnitude of companies impacted by the Sunburst hack should lend to positive spending dynamics across the space,” he writes.
  • Cloud adoption will propel supporting technologies: “As digital transformation continues to be a top priority, adjacent security and infrastructure opportunities will likely see positive fundamentals.”
  • Buyers will focus on broader risk management: “Operationalization of security data to more broadly assess risk and posture.”
  • The pandemic has led to permanent changes in work: “Remote everything will be pervasive (work, school, healthcare), opening up new opportunities for infrastructure players.”
  • Network security is moving to the cloud.

Owens lists his top picks in the security and infrastructure sectors as Splunk (SPLK), Palo Alto Networks (PANW), Tenable Holdings (TENB), and the newly upgraded DocuSign (DOCU). As part of the call, he upped his rating on the electronics signature company to Overweight from Neutral, with a new target price of $300, from $235.

He addresses the DocuSign upgrade in a separate note. “We believe e-signature embodies digital transformation of business processes, and revenue acceleration and [free cash flow] performance throughout the pandemic have only increased our confidence in execution and demand,” Owens writes. While noting that the stock rallied more than 200% in 2020, he sees more upside ahead as the company continues to capitalize on tailwinds.

  • On Splunk, a data analytics company that had a rough 2020 amid a shifting business model, Owens argues that investors are being too harsh. ”The market is too aggressively discounting Splunk due to recent complications to the story,” including a shift to a software-as-a-service revenue model, he writes. “We believe in the company’s differentiated and broad product suite, and a large and growing [addressable market] that limits downside risk from increasing competition.”
  • On Palo Alto Networks, he writes that the company “continues to prove out its leadership in the broader network security space, with consistent market share gains and growth.”
  • And on Tenable, he writes that the company’s “enterprise-focused, best-in-class portfolio with robust capabilities around vulnerability management will help the company to capitalize on favorable secular tailwinds.”

Owens also cut ratings on Okta (OKTA), Fortinet (FTNT), and Rapid7 (RPD) to Neutral from Overweight, citing recent price appreciation in their shares. He actually lifts his targets on both Fortinet (to $150 from $146) and Rapid7 (to $95 from $75), while keeping his Okta target at $250.

  • On Okta, Owens writes that he “remain[s] optimistic on the longer-term opportunity and relative strategic positioning, but see[s] a lack of near-term margin upside as we believe the company will pursue aggressive hiring in sales and development as it makes a bigger play as a platform in the identity space.”
  • On Fortinet, he writes that the company “continues to benefit from increased spending addressing work from home and broader tailwinds impacting security in the long term,” but that the rapid shift to cloud will more likely favor Palo Alto Networks. He thinks Fortinet “will have to make further acquisitions to build out its cloud portfolio.”
  • On Rapid 7, his view is that the company “remains a primary beneficiary of longer term digital transformation trends, and that the recent Sunburst hack will help accelerate demand further …[but that] the recent run in shares reflect much of this optimism and the favorable secular backdrop.”

The analyst also raised target prices on Overweight-rated CrowdStrike Holdings (CRWD), CyberArk Software (CYBR), Elastic (ESTC), Palo Alto Networks, SailPoint Technologies Holdings (SAIL), Sumo Logic (SUMO), and VeriSign (VRSN).

He also raised targets on Neutral-rated Check Point Software Technologies (CHKP), FireEye (FEYE), ServiceNow (NOW), Ping Identity (PING), Tufin Software Technologies (TUFN), and Zscaler. He trimmed his price target for Neutral-rated JFrog (FROG) to $65 from $75.

In recent trading, DocuSign is up 2.2%, at $227.41, while Okta is off 1.8%, at $246.17, Fortinet is down 3.6%, at $140.36, and Rapid7 is down 3.3%, at $86.78. The S&P 500 is up 0.5%.

Write to Eric J. Savitz at [email protected]

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