What cybersecurity companies will succeed?
Recent SaaS earnings might reveal some insights
Disclaimer: Opinions expressed are solely my own and do not express the views or opinions of my employer or any other entities with which I am affiliated.
I’m a regular reader and follower of How They Make Money. Bertrand Seguin does a diligent job of reading through earnings and providing stock insights that are more than just a restatement of the earnings. I’ve talked with him about cybersecurity stocks, and he finds to be fascinating. So, they regularly make an appearance on his blog. However, he covers all technology stocks, so it makes sense that he doesn’t have the technical depth to dive into the product and make more product-focused analyses. That’s fine. That’s where I come in. But, overall, he writes a great blog, and I encourage you to subscribe if you’re interested in getting a good business analysis on various public market technology stocks.
Recently, he wrote about cybersecurity earnings, discussing 5 stocks, Palo Alto Networks, Crowdstrike, Fortinet, Zscaler, and Cloudflare. Based on recent earnings, he believes that Crowdstrike and Zscaler will continue to perform well. Cloudflare is TBD given its new revenue executive. Palo Alto Networks and Fortinet might struggle a bit, especially given their exposure to security hardware. He does an analysis of their business, and it’s worth a read.
I think Bertrand does a good analysis based on the public filings, but I don’t fully agree with his conclusions. That shouldn’t be surprising because he’s basing his analysis purely on the business, and I have more product-based insights. For example, I believe that Cloudflare will continue to perform well and face tailwinds rather than the headwinds he predicted, given its position as an infrastructure company, similar to AWS and Azure.
Anyway, what’s more interesting was the prelude. He declared, “Software has fallen,” and I couldn’t agree more. Software and SaaS have been overhyped without a proper understanding of the business risks. He discussed why it’s hard to disrupt the incumbents (and even the incumbents struggle):
Distribution: The main expense for most software companies isn’t research & development. It’s sales & marketing. Scale and distribution are the real moat.
Switching costs: A good freemium software is not enough to disrupt existing solutions. Slack and Zoom are exhibit A.
Margin improvements: The resources needed to develop new features will decline for everyone, giving market leaders more flexibility.
Total Cost of Ownership: Implementing and maintaining an Enterprise software solution isn’t like a Netflix subscription. TCO factors the software cost, the time, and expenses saved in the process. IT departments take a holistic view.
He flags cybersecurity as an exception because of tailwinds and AI. Given the increase in attacks, there’s a greater need for robust security solutions.
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