We improved our economic scores for Check Point Software Technologies (CHKP), Fortinet (FTNT), and Palo Alto Networks (PANW) wide narrow. For our moat trend odds, we held Palo Alto positive, adjusted Fortinet positive from stable, and held Check Point stable. The improvements in the moat rating also resulted in increases in the fair value estimate: to $ 137 per share from $ 132 for Check Point, to $ 285 per share from $ 250 for Fortinet and to $ 585 per share from $ 550 for Palo Alto.
These three network security companies have established prolific customer switching costs and network effects, helping to generate solid records of excess economic returns on invested capital that we expect to support.
- The costs of changing customers come from security solutions, which are essential to operations. We believe that widespread digital transformation initiatives during the pandemic have directly highlighted the importance of adequate security. We expect the threat landscape to intensify as organizations need to protect a mix of data, applications, and users across various locations. Combine these enduring factors with a growing body of standards around cybersecurity safeguards, punitive fines for data errors, and the huge costs of business disruption caused by successful cyber attacks, and we believe the major vendors of cybersecurity have a robust long-term demand environment.
- Network effects arise from the collection and anomaly analysis of emerging threats resulting in continuous upgrades of security products. Businesses want the latest threat prevention measures, spawning a virtuous cycle of security technology upgrades and customer additions.
Cyber security is not a market where everyone wins, but we believe that some sub-segments will have a few dominant players. For us, this means that vendors can establish moats in various sub-segments of the $ 130 billion cybersecurity market, and some segments like network security (which includes a firewall and requires around 20-25% of 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 grow outside of their core solutions to increase their spend.
Changing security providers today is more difficult than it was ten years ago due to the integration of features covering various aspects of security, in our opinion. These three major cybersecurity companies have built security platforms containing their main firewall security products as well as tangential solutions. The cybersecurity purchasing model has moved away from point-based security solutions, which has led to the proliferation of security tools within organizations, and towards fewer key vendors that cover particular security elements. . Based on various industry reports, we estimate that companies maintain 60-80 different security solutions, but want to condense that to 15-20 key vendors. We believe Check Point, Fortinet, and Palo Alto have top-notch platforms that will keep customers locked into their ecosystem for the long haul.
The positive trend scores for Fortinet and Palo Alto come from larger, stickier contracts from these companies, with high-growth customer bases – and those contracts can include various products per contract. These companies are also gaining traction in areas outside of their core network security offerings, such as cloud security, automation of security responses, and software-defined networking. We believe that the two positive trending companies make customers more dependent on their solutions and lock them more into their ecosystems.
Regarding Check Point’s stable trend, we believe the company has a large and loyal customer base that relies on its sticky products, but its conservative approach to investing in development and sales efforts and Marketing has driven major competitors to make inroads into the broader security arena. countryside. Nonetheless, we believe that these three network security providers will remain leaders and are essential to the day-to-day operations of organizations.