2023 was a banner year for software and cybersecurity stocks, as well as the broader technology sector. With inflation appearing to be cooling and a recent rally in the S&P 500 (^GSPC), can these stocks continue to see upside into 2024? Barclays Senior Analyst Saket Kalia spoke with Yahoo Finance Anchor Seana Smith at the Barclays Global Technology Conference to discuss the outlook for software and cybersecurity stocks in the next fiscal year.
Kalia claims, based on the presentations he witnessed, what the environment will look like next year: "On the cybersecurity front, it feels very stable and I think the assumptions for Q4 are not that huge."
Watch the video above to hear about Kalia's three growth opportunities in cybersecurity and his top stock picks.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Video transcription
Welcome back to Yahoo Finance, well 2023 has really been a strong performing year for so many of these software and cybersecurity names, with names like CrowdStrike Alchemy and Sentinel 1 outperforming, but is there more room to run, we want to bring in someone who knows a thing or two about that we have saket kalia, he is a Barclays US Senior analyst covering mid and small cap software. Zach, it's great to have you here. Great to be here, Seana. Thank you, so you've actually spent the last few days talking to CEOs, investors, getting their feelings about how they're feeling heading into 2024. What's your takeaway from some of those conversations? I would say the environment feels a little bit more stable when we look at areas of security, like endpoint security. For example, we saw really good results from people like Sentinel and really good results from people like CrowdStrike, who are also diversifying companies more. And so in terms of cybersecurity, it feels very stable. And I think the fourth quarter assumptions aren't that huge so within security I felt pretty good coming out of the presentations yesterday and what are some of those growth opportunities what do they look like more specifically as you look ahead after the fourth quarter and to 2024 You absolutely know. I think there are really three that were discussed at multiple companies yesterday. The first is this bold trend, which is Secure Access Service Edge, which is truly a new architecture for network security. I think you'll see companies like Zscaler play there, as well as some private companies. I think the second one is cloud security, so if you're really protecting workloads in the public cloud, you have names like CrowdStrike and Sentinel 1 that are doing great work in that area, as well as some private companies. And I think the third one is really this idea of a security data lake, so you're seeing some big mergers and acquisitions with Cisco acquiring Splunk. I think there are some competitors that see an opportunity for some stock gains so I think those are the three trends that we've heard from some of our security companies what are some of those competitors out there that you mentioned that there's an opportunity on stock gains? Yeah, you know, I think so, you hear names like CrowdStrike and Sentinel 1 talking about really potentially disrupting this space in Sim you have companies like Rapid7 competing in that space as well as some people in the private sector. So that's a listen. Cisco Splunk is obviously going to be a very powerful combination, but I think there are a number of people looking to reimagine that space with maybe a little bit of a lighter weight solution, maybe if you look at the outperformance of some of these names, I have one number stated at the top. But let's talk about CrowdStrike specifically, because this is a stock that's up over 130% year-to-date if you look at that name, and there's enough of that kind of outperformance to see the momentum carry over to the new year, you know. Sean, I actually think it is and I can really see a few reasons for that. The first is that even though it's just a great growth story within security, there's good free cash flow support and so on and so on I think if you look out in a few years, I mean this is a company that's talking about reaching $10 billion in RN over time. there will be really good support in the next five to seven years. I think the other thing we're going to see in 24 from Crowdstrike is an increasingly diversifying company. And what that really reminds me of is that Palo Alto Networks 18 to 24 months ago, more of that business really came out of a platform game. And I think investors appreciate that diversification. I think that's what keeps the CrowdStrike story going in 24 and Zach, so much has been said about it. I'm clearly the driving factor here in a lot of the performance we've seen from these companies over the past year. As you look ahead to 2024, what are some of your best ideas or best actions to take advantage of some of this momentum? Yes, absolutely just so you know. I would probably think of three names that I especially like for next year. So the first within security within security, but more on the consumer side is Gen Digital, so Gen just as background as the combination of NortonLifeLock plus avast, you know, I think you're just seeing some improving net subscribers, adds that this a 60% operating margin company will show EPS growth of 12% to 15% in the coming years, trading at a very tasty earnings valuation. So I think this is the first one you know. I think the second one is what we've been talking about here with CrowdStrike, just that diversification play in that good free cash flow support. I think the third one here is a company that, unfortunately, could be at the conference because they reported yesterday. But as Veeva systems, this is a leader in vertical specific life sciences software and I think this is their share. I think it has good free cash flow support, 10% to 15% growth, just a solid, good quality business. Those are some of what I'm thinking about for next year and it certainly sounds like there's a lot of opportunity, a lot of reason to be optimistic as we look ahead to the next few quarters. But in terms of some of the risks or maybe what investors need to be aware of as we gear up and they're trying to figure out their portfolios, what are some of the risks that you're seeing that's at least top of mind right now , are you sure you know I think there may be some discussion in the short term about whether we will see in this December quarter the amount of budget that we have seen in previous years just given the macro . If I run that on 24, who knows what the IT budgets will look like in 24 years. We will see some stability. But I think it really does ensure that expectations for recovery in some key metrics, like RN, are really in line with those budgets for next year. I think these are some of the things we want to explore as we dig deeper into some great advice there Carla Thank you so much for taking the time. Thank you so much for having me.
