Investing.com -- Morgan Stanley made changes to its cybersecurity stock ratings on Monday, reflecting a more cautious stance for 2025 amid an evolving market environment.
While long-term prospects for the industry remain positive, analysts are adopting a more selective approach due to near-term pricing pressures and a less favorable U.S. fiscal backdrop.
The firm remains "positive on long-term tailwinds in security," driven by advancements like GenAI and public cloud, which expand the attack surface and create new security needs.
However, Morgan Stanley (NYSE:MS) highlights several near-term risks. They note the spending environment is stable but still challenging, with tight budgets and increasing vendor consolidation putting pressure on pricing.
"CIOs/CISOs [are] looking to consolidate multiple vendors," which could negatively impact prices in 2025, according to the investment bank.
In light of these pressures, the firm upgraded two cybersecurity stocks while downgrading others.
Morgan Stanley upgraded Cloudflare (NYSE:NET) and Okta (NASDAQ:OKTA) to Overweight, citing emerging AI product cycles and turnaround opportunities, respectively.
The bank sees incremental upside in companies with emerging product cycles, such as NET's growth in Edge AI and OKTA's improving demand and product cycles.
On the other hand, SentinelOne (NYSE:S) and Tenable were downgraded to Equal-Weight from Overweight.
The downgrade of S reflects a "slower expected demand for core endpoint security in 2025" and pricing pressures from competitors. Meanwhile, TENB is said to face risks due to its high exposure to the U.S. public sector, which could see budget cuts.
Morgan Stanley also continues to favor "platform consolidators" like Palo Alto Networks (NASDAQ:PANW) and CrowdStrike (NASDAQ:CRWD) in the long term but notes that near-term headwinds could limit their upside as they work through platformization challenges and above-average valuations.
Overall, while cybersecurity remains a key priority for organizations, near-term risks ”may not be fully appreciated by investors heading into 2025," the firm concludes.