These stocks mostly doubled but are still the place to be: Bank of America

A good example of this is cybersecurity. And despite the sector having a great 2023 — with leading cyber stocks doubling on average — it is “still the place to be,” according to Bank of America.

“Cybersecurity is a highly defensible area of IT spend and should remain a top secular theme for technology and software investors in 2024, especially as enterprise security budgets should increase over the next twelve months,” says a team of BofA analysts led by Tal Liani.

In plain speaking, improving the security of networks is something companies feel they have to do, even during cyclical downturns. Explaining why you didn’t after a data breach or malware attack is not a good look for the C-suite. Hence the responses BofA received and shown in the pie chart below.

Another growth trend in cybersecurity is the consolidation of products and vendors, known as platformization. The average company, BofA says, often has 50 to 70 different cybersecurity solutions, cobbled together as the enterprise has grown, many of which provide overlapping functions.

“[S]ince enterprises have been under pressure to tighten IT spend while keeping networks secure, the value proposition of platformization, or using a platform vendor in place of several point products, has become increasingly prevalent,” says BofA.

Companies that offer cybersecurity products across a single platform and have already benefited from this trend include Fortinet

FTNT,

Palo Alto Networks

PANW,

CrowdStrike

CRWD,

and Microsoft

MSFT,

according to Bank of America, though the team stresses that some of the hype about platformization has been overstated.

Indeed, the firm accepts that while net spending on cybersecurity will increase, the sector is not completely immune to finance departments’ focus on cost reduction as economies slow.

“Weak macro conditions are driving longer sales cycles, increased scrutiny for procurement processes, and a decline in deal durations,” says BofA.

Still, with many companies also needing to better protect their cloud-based networks, and the rise of AI-related cyber attacks driving the demand for AI-implemented cybersecurity, the sector looks set fair.

The big issue for investors is that much of the above structural tailwinds have been recognized, driving cybersecurity stocks higher over the past two years. For example, the shares of CrowdStrike, Palo Alto Networks, and Zscaler

ZS

were up 147%, 113%, and 101%, respectively, in 2023, BofA notes.

Because of this, BofA’s best buys in the sector are those stocks that have been laggards in valuation but which to the bank’s mind still have good growth prospects.

“We highlight Fortinet as a top pick for 2024, as we believe the stock performance should improve once the business momentum improves in 2H24,” says BofA. “We also favor CyberArk

CYBR,

which continues to exhibit strong business momentum, yet trades at a discount to other successful cybersecurity stocks.”

The bank also maintains its buy rating on CrowdStrike and Zscaler, though feels it should “highlight the growing valuation risk into 2024.”

Markets

U.S. stock-index futures

ES00


YM00


NQ00

are lower as benchmark Treasury yields
BX:TMUBMUSD10Y
rise. The dollar
DXY
is stronger, while oil prices

CL

gain and gold

GC00

trades around $2,040 an ounce..

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The buzz

The December nonfarm payrolls report will be published at 8:30 a.m. Eastern. Economists forecast that a net 170,000 jobs were added, down from 199,000 in November. The unemployment rate is expected to move up from 3.7% to 3.8%, while month-on-month hourly wages will grow 0.3% against 0.4% in November.

Other U.S. economic data due on Friday includes December ISM services alongside factory orders for the same month, both published at 10 a.m.

Richmond Fed President Tom Barkin will speak to the Maryland Bankers Association at 1:30 p.m.

Core eurozone consumer price inflation, which strips out volatile items like food and energy, fell to 3.4% in the year to December, down from 3.6% in November.

Tesla shares

TSLA

are a touch softer in premarket trading after it was reported the company would do a software ‘recall’ of 1.62 million cars in China.

Exxon Mobil

XOM

says it might write down the value of its California assets by as much as $2.6 billion.

Medical Properties Trust

MPW

shares slumped in premarket trade after saying it will give additional financial support to its largest tenant.

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Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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