Geopolitical headwinds are currently creating turbulence across the cybersecurity landscape, affecting key players such as Palo Alto Networks, CrowdStrike, and Broadcom. However, these developments do not alter our fundamental investment outlook on these companies.
Recent reports indicate that Chinese authorities have directed domestic firms to cease using cybersecurity software from several U.S. and Israeli providers, including Palo Alto Networks, CrowdStrike, Fortinet, and VMware (a Broadcom subsidiary). The stated rationale centers on national security, with concerns that such software could be exploited to gather sensitive data and exfiltrate it internationally. This move arrives amid escalating U.S. restrictions on advanced AI chip exports to China, justified by national security considerations and the potential for military applications. In response, China has reportedly instructed customs officials to restrict the import of Nvidia’s H200 chips and advised tech companies to limit purchases to essential needs. The uncertainty surrounding Nvidia’s significant China market has contributed to a broader downturn in the semiconductor sector.
Palo Alto Networks experienced a dip of up to 3% in early trading on Wednesday, though it later stabilized. CrowdStrike saw a decline of 1.7%, while Broadcom shares fell over 4%. Despite these fluctuations, our conviction in all three companies remains strong.
We view Palo Alto Networks favorably due to its “platformization” strategy, which consolidates best-in-class technologies to offer comprehensive protection against increasingly sophisticated cyber threats. Recent strategic acquisitions of CyberArk, an identity security specialist, and Chronosphere, an observability platform, further enhance its competitive edge. Furthermore, Palo Alto Networks has minimal exposure to China, which constitutes only 2.2% of its total revenue, according to FactSet. This limited dependence likely contributed to the stock’s recovery. The United States remains its primary market, accounting for 63% of revenue. While China represented 6% year-over-year growth, the broader Asia Pacific region saw 16.6% sales growth, and the Americas experienced a 13.3% increase. We maintain a price target of $225 and a “1” rating on Palo Alto Networks.
CrowdStrike was also reportedly included in China’s ban. However, the company has clarified that it does not have direct product sales within China, rendering any potential financial impact negligible. Consequently, the stock’s movement is likely a reflection of broader market sentiment. We reiterate our “1” rating and $550 price target, recognizing CrowdStrike’s resilience within the enterprise software sector, which faces potential disruption from AI advancements.
Broadcom, a custom chip designer, derives 17% of its revenue from China. However, the U.S. remains its largest market by revenue share at 25%. The decline in Broadcom’s stock may also be linked to the general market sell-off in the chip industry, which was notably impacted by Nvidia’s performance.
Broadcom has been described as a “battleground stock,” and we are currently assessing the strength of demand for its custom AI chip business, a critical factor in accurately valuing the company. Its shares are trading at a forward price-to-earnings multiple of 31, positioning it in the mid-range of its two-year trading activity. Investor appetite for the stock has grown in recent years, with the market pricing in significant AI-driven growth potential. We anticipate that Broadcom’s substantial AI-related backlog, exceeding $73 billion, will fuel accelerated earnings expansion. We maintain a “2” rating on Broadcom, suggesting a preference to wait for a price pullback before increasing positions, and a price target of $425.
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