2025-12-20 09:54Summary of the 2026 Year Ahead Outlook: Securing The Agentic Wave Industry Overview - Industry: Security Software - Key Analysts: Brian Essex, CFA; John Lee; Alex Isaac from J.P. Morgan Securities LLC Core Insights 1. Favorable Outlook for Security Software in 2026 - The demand backdrop is healthy with reasonable expectations and attractive setups for better-than-expected execution - Top picks include PANW, CLBT, NTSK, and ZS, while FTNT is moved to Underweight due to competitive disadvantages [13][25] 2. Market Dynamics in 2025 - 2025 was marked by macro uncertainty, leading to a slight contraction in average multiples across the coverage - Security software benefitted from a rotation towards stronger thematic names, particularly those with AI tailwinds [14][22] 3. Budget Pressures and Spending Trends - IT Security budgets are expected to grow at a slower pace compared to previous years, with a lower percentage of IT spending allocated to Security - Most budget pressure will impact headcount-related spending, while software spending remains healthy [22][62] 4. AI's Impact on Security - AI has increased the volume and sophistication of threats, necessitating a focus on Network Security, Endpoint, and Identity - Demand for SASE (Secure Access Service Edge) remains elevated, driven by AI adoption [23][24] 5. Platformization and Vendor Performance - Spending is expected to favor platform vendors that can consolidate across multiple high-priority categories - Established platforms are well-positioned for margin expansion and free cash flow growth [24][27] Key Company Insights 1. Top Picks for 2026 - PANW: Comprehensive end-to-end platform with strong share consolidation capabilities; expected FCF margin expansion to 40% or better [27] - CLBT: Positioned for reacceleration driven by government demand; attractive valuation for potential 20%+ y/y growth [28] - NTSK: High-growth vendor with improving market traction; well-positioned for demand in Network, Data, and AI security [29] - ZS: Benefitting from a shift in Network Security spending; expected to gain from an expanding attack surface [30] 2. Underweight Ratings - FTNT: Facing challenges as a platform consolidator; current market conditions are unfavorable for stock performance [25] Additional Insights 1. Consolidation Trends - M&A activity is expected to accelerate, with private companies driving innovation in the security software space - Notable acquisitions include CyberArk by PANW and several others across the industry [105] 2. Emerging Threats and Security Needs - Cyber risks remain a top concern for C-suite executives, with a growing need for solutions to secure AI and machine identities - The market for securing AI is fragmented but expected to grow as larger players invest in this area [145][148] 3. Growth Projections - Security software is projected to remain a high-growth sector, with significant opportunities in Cloud Security, Data Privacy, and Endpoint Security - Expected CAGRs from 2024-2029 include Cloud Security at 24% and Data/Privacy at 13% [83] 4. Valuation and Fundamentals - Average multiples have contracted, but high-growth vendors are beginning to see multiple appreciation as interest rates stabilize - Companies that can reaccelerate growth while improving profitability will be favored in the market [111][116] This summary encapsulates the key points from the 2026 Year Ahead Outlook for the Security Software industry, highlighting the anticipated trends, company performances, and market dynamics.