Security _ SMidCap Software_2025 Year Ahead Outlook_ Security Finds Its Footing

Key Takeaways Industry Overview * Security Software Demand Remains Strong: Despite macroeconomic challenges, demand for security software remains robust. This is driven by the increasing volume and severity of cyber threats, the growing importance of data security, and the shift towards digital transformation. * Platformization Trend: The trend of consolidating security solutions into a single platform continues to gain momentum. This is driven by the need for simplicity, efficiency, and cost savings. * M&A Activity Accelerating: M&A activity in the security software industry is accelerating, with both strategic and financial buyers seeking to expand their capabilities and market share. Company-Specific Outlook * CyberArk (CYBR): CYBR remains a strong pick with a favorable competitive environment, expanding margins, and potential for long-term margin expansion and cash flow generation. * SentinelOne (S): S is well-positioned for growth as a sustainable profitable emerging competitor with a compelling setup for 2025. * Okta (OKTA): OKTA is a leader in IAM and a primary beneficiary of the growing strategic importance of Identity Security. * CrowdStrike (CRWD): CRWD is expected to reaccelerate growth and profitability following the July 19th outage. * Palo Alto Networks (PANW): PANW is well-positioned to consolidate share within several of the largest and highest priority enterprise security markets. * Zscaler (ZS): ZS is a leader in SSE/SASE markets and a beneficiary of enterprise spending and vendor consolidation. * Tenable (TENB): TENB is well-positioned for better growth, as the company continues to take share at the expense of its VM-related peers. * Fortinet (FTNT): FTNT is well-positioned to benefit from a firewall refresh cycle in FY26 but faces near-term headwinds. * Check Point (CHKP): CHKP is well-positioned for Hybrid Cloud and Digital Transformation growth but faces valuation challenges. * N-able (NABL): NABL is still relatively early with platform expansion efforts but faces near-term headwinds. * Rapid7 (RPD): RPD is well-aligned with elevated SecOps and Cloud Security demand but faces execution challenges. * Varonis (VRNS): VRNS is delivering better than expected execution with its SaaS transition and is well-positioned for growth. * Qualys (QLYS): QLYS is targeting TAM expansion but faces challenges with customer/revenue growth. * CS Disco (LAW): LAW is facing execution challenges and a lack of profitability. Sector Themes * Securing AI: The rise of Generative AI presents new security challenges and opportunities. Security software companies are developing solutions to secure AI across the infrastructure, data, model, access, and outputs. * Data Security: Data security is becoming increasingly important, driven by the growing volume of data and the increasing number of data breaches. * Convergence of Cyber and Physical: The convergence of cyber and physical security is blurring the lines between the two domains and creating new opportunities for security software companies. * Cloud Security: Cloud security remains one of the fastest-growing segments within security, driven by the shift towards cloud computing. * SASE/SSE: Secure Access Service Edge (SASE) and Secure Service Edge (SSE) are gaining momentum as solutions for securing hybrid networks. Valuation and Fundamentals * Profitability Matters: Companies with strong unit economics and embedded operating leverage are well-positioned to deliver better gross margins and LTV. * Platformization: Companies with strong platform capabilities are well-positioned to deliver greater levels of margin expansion and FCF growth. * M&A Activity: M&A activity can provide a significant boost to growth and profitability. Conclusion The security software industry remains a strong investment opportunity with a healthy demand backdrop, reasonable expectations, and a number of attractive setups for better than expected execution. Companies with strong platform capabilities, a focus on profitability, and the ability to innovate and adapt to changing market conditions are well-positioned to succeed.