Investing.com — Morgan tanley has identified three cybersecurity stocks as top picks ahead of earnings season, as the sector has outperformed the broader software basket by over 20% in the past month.
Cybersecurity names have rallied recently, breaking away from software stocks as concerns about artificial intelligence threats have eased. Performance year-to-date has been largely based on exposure to AI threats, according to Morgan Stanley. While it is still early to see meaningful AI revenue, the firm expects outperformance from categories addressing technical debt, including firewalls, endpoint detection and response, and some secure access service edge solutions.
The recent outperformance sets a more challenging bar for off-cycle names, but Morgan Stanley believes there are catalysts ahead. On-cycle earnings from both cybersecurity and general software companies have been bifurcated, with stronger results being rewarded and more challenged results being penalized. This has led to meaningful dispersion of performance, with the universe roughly flat year-to-date but individual stock performance ranging from positive 50% to negative 50%.
1. Palo Alto Networks
Morgan Stanley favors as a higher quality name with clear AI tailwinds heading into earnings. The firm expects PANW to benefit from the removal of technical debt in firewalls and SASE categories. Additionally, pre-purchasing activity is taking place to get ahead of memory-driven price increases, which should benefit PANW. The identity market, where AI tailwinds are beginning to emerge, also positions PANW favorably.
In recent news, Palo Alto Networks received price target increases from several firms, including Cantor Fitzgerald, Stifel, and Morgan Stanley. The company also announced the launch of Idira, a new identity security platform.
2. CrowdStrike
is highlighted as another top pick with exposure to technical debt removal in the endpoint detection and response category. Morgan Stanley expects CRWD to perform well among off-cycle names, though the stock faces competitive pressure from other cybersecurity providers and Microsoft.
CrowdStrike has seen several price target increases from analysts at firms including Cantor Fitzgerald, KeyBanc, and TD Cowen. The company also launched Jet, a new mobile application for its sales partners.
3. SentinelOne
Morgan Stanley favors S heading into earnings, citing its exposure to categories addressing technical debt. The firm has a $17 price target based on 36 times enterprise value to fiscal 2027 estimated free cash flow of $165 million, discounted at 12%. Risks include increased competitive pressure and difficulty moving up market into the large enterprise segment.
Analysts at Cantor Fitzgerald and TD Cowen recently reiterated their respective Overweight and Buy ratings on SentinelOne.
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