We improved our moat ratings for Check Point Software Technologies (CHKP), Fortinet (FTNT), and Palo Alto networks (PANW) wide to narrow. For our moat trend ratings, we held Palo Alto to positive, adjusted Fortinet to positive from stable, and held Check Point to stable. The moat rating upgrades also resulted in fair value estimate increases: from $132 to $137 per share for Check Point, to $285 per share from $250 for Fortinet and to $585 per $550 action for Palo Alto.
These three network security companies have established prolific customer switching costs and network effects, helping to generate strong records of excess economic returns on the invested capital we expect to sustain.
- Customer switching costs come from security solutions, which are critical to operations. We believe the widespread digital transformation initiatives during the pandemic have brought into direct focus the importance of proper security. We expect the threat landscape to intensify as organizations need to protect a mix of data, applications, and users across different locations. Combine these enduring factors with a growing number of standards regarding cybersecurity safeguards, punitive fines for data errors, and the enormous costs of business disruption caused by successful cyberattacks, and we believe that leading cybersecurity vendors have a robust long-term demand environment.
- The effects on the network come from the collection and analysis of anomalies of emerging threats resulting in continuous upgrades of security products. Businesses want the latest threat prevention, driving a virtuous cycle of security technology upgrades and customer additions.
Cybersecurity is not a win-win market, but we believe that certain sub-segments will have a few dominating players. For us, this means that vendors can establish moats in various sub-segments of the $130 billion cybersecurity market, and certain segments like network security (which includes firewall and requires around 20-25% security product budgets) may have multiple companies with large moats. . We believe that the network security market will continue to consolidate around Check Point, Fortinet and Palo Alto and that these companies will continue to expand outside of their core solutions to increase their spend.
Switching security vendors today is more difficult than ten years ago due to the integration of features covering various aspects of security, in our opinion. These three leading cybersecurity companies have built security platforms containing their core firewall security products as well as tangential solutions. The cybersecurity purchasing model has moved away from point-based security solutions, which has resulted in a proliferation of security tools within organizations, and toward fewer key vendors who cover particular security elements. Based on various industry reports, we estimate that companies maintain 60-80 different security solutions, but want to condense this down to 15-20 key vendors. We believe that Check Point, Fortinet, and Palo Alto have industry-leading platforms that will keep customers locked into their ecosystem for the long term.
The positive trend ratings for Fortinet and Palo Alto come from those companies’ larger, stickier deals with fast-growing customer bases — and those deals may include different products per deal. These companies are also gaining traction in areas outside of their core network security offerings, such as cloud security, security response automation, and software-defined networking. We believe both positively trending companies are making customers more dependent on their solutions and locking customers into their ecosystems more.
Regarding Check Point’s stable trend, we believe the company has a large loyal customer base that relies on its sticky products, but its conservative approach to investment in development and sales efforts and marketing has pushed its major competitors to make inroads into broader security. countryside. Nevertheless, we believe that these three network security vendors will remain leaders and be essential to the day-to-day operations of organizations.