Microsoft (MSFT) updated plans to expand further into cybersecurity this week, creating chaos in pure-play vendors like Club name Palo Alto Networks (PANW). While dropping 7% on Wednesday after the Microsoft announcement, PANW shares clawed back roughly half those losses and edged higher Friday. We think that decline was an overreaction and the bounce since shows that investors have come to realize that Microsoft’s moves pose little threat to cybersecurity leader Palo Alto. “I’m not worried one bit about what Microsoft is doing,” Jim Cramer said during the Club’s monthly meeting Wednesday. Microsoft, late Tuesday, announced two new products focusing on securing cloud access and protecting identities. Both Entra Internet Access and Entra Private Access are in preview. The offerings signal Microsoft’s first steps into the saturated Secure Access Service Edge (SASE) market, a large part of the cybersecurity dominated by smaller firms like Palo Alto. PANW YTD mountain Palo Alto Networks YTD performance In an interview on “Mad Money” on Thursday evening, Palo Alto Networks CEO Nikesh Arora told Jim Cramer, “From what I read, [Microsoft is] sort of heading off into a good start, but they have a long way to go.” Arora said the SASE space is going to be “very huge” and Microsoft’s interest is a “huge validation for the market.” However, he stressed, “We’ve sowed the seeds and invested in this five years ago.” In a note to clients, Jefferies analyst Brent Thill said the Microsoft move could have “potential longer-term ramifications to vendors,” like Palo Alto, along with other cybersecurity players such as Cloudfare and Zscaler , which saw less severe Wednesday declines and more robust bounces. Microsoft was looking to make Friday four straight sessions of gains. By contrast, Goldman Sachs analyst Gabriela Borges told clients Wednesday that cybersecurity players can weather the Microsoft storm. “Many enterprises and small businesses rely on Microsoft to provide a baseline level of security, and then overlay best-in-breed providers,” according to teh note. “We view cloud security as a good example of a total addressable market where both Microsoft and third parties such as Palo Alto … are capturing growth.” The risk here is that the sheer size of Microsoft, along with vast resources, could take market share from PANW and others or outright bury them down the road. Providing context in this David-and-Goliath story: Palo Alto Networks has a stock market value of nearly $74 billion — in the top 25% of the S & P 500 — whereas Microsoft has a market cap of $2.5 trillion — making it the second most valuable company just behind fellow Club name Apple (AAPL). Additionally, Microsoft’s security efforts have proven to be lucrative so far. In a recent memo, revealed as part of a court hearing , CEO Satya Nadella said that by the 2030 fiscal year, the firm’s Security, Compliance, Identity and Management business could notch $100 billion in revenue. The company’s annual security revenue surpassed $20 billion last year, surging 33% from 2021. Bottom line We believe Palo Alto will stay the cybersecurity leader regardless of Microsoft’s announcement. Founded in 2005, Palo Alto has been in the space much longer than Microsoft, and it has a first-mover advantage. The company will likely be the first in the cybersecurity sector to hit a $100 billion market value, according to JPMorgan. Additionally, Microsoft’s products haven’t been fully released yet and have limited functionality so it’s unlikely that the industry will see any real impact soon. “The Microsoft program is vaporware. This is an attack by the bears,” Jim said. “Palo Alto is the king of that particular area of cybersecurity,” he added. “Microsoft has not been a real threat in cybersecurity.” On Monday, while still a huge fan of the stock, the Club nearly trimmed some of its PANW holdings ahead of the Nasdaq 100 special rebalancing later this month aimed at tweaking the overconcentration of Big Tech on the index. “This is no reflection on the wonders that Nikesh Arora has pulled off, creating the only real soup to nuts cyber play,” Jim said. (Jim Cramer’s Charitable Trust is long MSFT, PANW, AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Signage outside Palo Alto Networks headquarters in Santa Clara, California, U.S., on Thursday, May 13, 2021.
David Paul Morris | Bloomberg | Getty Images
Microsoft (MSFT) updated plans to expand further into cybersecurity this week, creating chaos in pure-play vendors like Club name Palo Alto Networks (PANW).
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