Three growth opportunities for cybersecurity stocks

Technology stocks led the market rally this year amid excitement surrounding AI, pushing the Nasdaq up nearly 40% year-to-date.

But will momentum carry over to 2024? Barclays Senior Analyst Saket Kalia sat down with Yahoo Finance Anchor Seana Smith at the Barclays Global Technology Conference in San Francisco to share his top picks for 2024 — Gen Digital, Crowdstrike, and Veeva Systems.

"Cybersecurity feels very stable and the assumptions for Q4 aren't all that herculean," Kalia said.

Watch the video above to hear about Kalia's three opportunities for growth in the cybersecurity space 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 transcript

SEANA SMITH: Welcome back to Yahoo Finance. Well, 2023 was really an outperforming year for so many of these software and cybersecurity names, with names like CrowdStrike, Alchemai, and SentinelOne 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 plays. Saket, it's great to have you here.

SAKET KALIA: Great to be here, Seana. Thank you.

SEANA SMITH: So you've been spending the last day or two really speaking with CEOs, investors, getting their sentiment, what they're feeling ahead of 2024. What's your takeaway from some of those conversations?

SAKET KALIA: You know, I would say the environment feels a little bit more stable. If we look in areas in security like endpoint security, for example, we saw really good results from folks like SentinelOne, really good results from folks like CrowdStrike, more diversifying businesses as well. And so in areas of cybersecurity, it feels very stable. And I think the assumptions for Q4 aren't all that Herculean. So within security, I felt pretty good coming out of the presentations yesterday.

SEANA SMITH: And what are some of those growth opportunities? What more specifically do they look like as you look ahead beyond Q4 and into 2024?

SAKET KALIA: Absolutely. You know, I think that there are really three that were discussed yesterday across multiple companies. The first one is this trend of SASE, which is secure access service edge, really a new architecture for network security. I think you're gonna see companies like Zscaler play there as well as, some private companies as well.

I think the second one is cloud security, so really protecting workloads in the public cloud. You've got names like CrowdStrike and SentinelOne that do great jobs in that space as well as, some private companies too.

And I think the third one is really this idea of a security data lake. So you see some big M&A with Cisco acquiring Splunk. I think there are some competitors there that see opportunities for some share gain. So I think those are the three trends that we heard from a few of our security companies.

SEANA SMITH: What are some of those competitors there that you mentioned that there is some opportunity there for share gain?

SAKET KALIA: Yeah. You know, I think-- so you hear names like CrowdStrike and SentinelOne talk about really potentially disrupting this space in SIEM. You have companies like Rapid7 that compete in that space as well, as well as some folks in the private side. So that's a-- listen, Cisco Splunk is gonna be a very powerful combination, of course. But I think there are some folks that wanna reimagine that space with maybe a little bit of a lighter solution perhaps.

SEANA SMITH: When you take a look at the outperformance of some of these names-- I listed some of those there at the top. But specifically, let's talk about CrowdStrike because this is a stock that's up over 130% since the start of the year. When you take a look at that name and that type of outperformance, is there enough to see that momentum carry over into the new year?

SAKET KALIA: You know, Seana, I actually think there is. And I can see really a couple of reasons for that. The first one is despite being just a great growth story within security, there's good free cash flow support. And so I think as you look out a couple of years, I mean, this is a company that's talking about, you know, reaching $10 billion in ARR over the next five to seven years. There's really good support.

I think the other thing that we're gonna see in '24 from CrowdStrike is an increasingly diversifying business. And so really what that reminds me of is Palo Alto Networks 18 to 24 months ago, right? More of that business is coming really from a platform play. And I think investors appreciate that diversification. I think that's what keeps the CrowdStrike story going in '24.

SEANA SMITH: And Saket, there's been so much about AI, obviously, really the driving factor here in a lot of the performance that we've seen from these companies over the last year. As you look ahead to 2024, what are some of your top ideas or top plays in order to capitalize on some of this momentum?

SAKET KALIA: Yeah, absolutely. So, you know, I'd probably-- I'd probably think about three names that I particularly like for next year. So first one within security, within security but more on the consumer side is Gen Digital. So Gen just as background is the combination of NortonLifeLock plus Avast.

You know, I think you're seeing just some improving net subscriber adds there. This is a 60% operating margin company, 12% to 15% EPS kicker over the next few years trading at a really palatable valuation on earnings. So I think that's the first one.

You know, I think the second one is the name that we've been talking about here with CrowdStrike just on that diversification play in that good free cash flow support. You know, I think the third one here is a company that, unfortunately, could be at the conference because they were reporting yesterday. But it's Veeva Systems.

This is a leader in vertical-specific software for life sciences. And I think this is their taken share. I think it's got good free cash flow support, 10% to 15% growth. Just a solid good quality business. Those are some that I'm thinking about for next year.

SEANA SMITH: And Saket, there certainly sounds like there's a lot of opportunity, a lot of reason to be optimistic as we look ahead to the next couple of quarters. But in terms of some of the risks or maybe what investors should be aware of as we gear up and they're trying to figure out their portfolios, what are some of the risks that you see at least that's top of mind right now?

SAKET KALIA: Sure. You know, I think that-- I think that maybe more near term, I think there is some debate as to whether we're going to see the amount of budget flush in this December quarter that we've seen in prior years just given the macro.

If I carry that out to '24, you know, who knows what sort of IT budgets will look like in '24. You know, knock on wood, we'll see some stability. But I think it's really-- it's really making sure that expectations for recovery in some key metrics like ARR, for example, really align with those budgets for next year. I think those are-- those are some of the things that we wanna explore as we kind of get deeper into '24.

SEANA SMITH: Some great advice there. Saket Kalia, thank you so much for taking the time.

SAKET KALIA: Thanks so much for having me.