Microsoft (MSFT) continues to put pressure on cybersecurity stocks with new products aimed at Zscaler (ZS), Palo Alto Networks (PANW), Cloudflare (NET), CrowdStrike Holdings (CRWD), and others. MSFT stock has kept on shining this year, with a 39% increase, amid an artificial intelligence-driven boom in the technology sector.
Zscaler shares slid 6.6% today, closing at 137.68 on the stock exchange. The Microsoft security revelation also caused ZS stock to slump 4.5% on Tuesday. Microsoft's stock increased 1.4% to 337.20 on Wednesday. PANW stock dropped 7% to 232.64.
Analysts believe Microsoft's foray into the computer security Secure Service Edge sector, known as SSE, will have an influence on other cybersecurity equities such as Palo Alto Networks, Cloudflare, and upstart Netskope.
Expansion in cybersecurity offerings
"While the offering will be competitive to the SSE vendors, we view Microsoft's competitive position in SSE as less strong than other areas of security where it has long had capabilities (endpoint, identity), and likely to be less competitive in the enterprise segment," said KeyBanc Capital analyst Michael Turits in a note to clients.
"The reaction to ZS stock appears overdone," noted analyst Roger Boyd at UBS, "especially when considering ZS's near-exclusive focus on the enterprise segment. The expectation is that the initial Microsoft Security Edge solution will be primarily aimed at small- and medium-sized businesses. Instead, we see this as a bigger risk for vendors with SMB exposure, including Cloudflare and potentially Fortinet (FTNT)."
By offering bulk discounts on numerous products to big businesses, Microsoft has put pressure on some cybersecurity stock prices.
A new automated cybersecurity product powered by generative AI was also released by Microsoft in early 2023. The platform manages threat detection using a new AI assistant and is known as Microsoft Security Copilot.
Analysts have reported that the software giant's security sector currently generates $20 billion in yearly sales and is increasing at a 33% annual rate. Microsoft bundles products through its Azure cloud computing business and Office 365 platform.
According to Goldman Sachs analyst Gabriela Borges, Microsoft's yearly research and development investment on security now exceeds $4 billion, up from $1 billion three years ago. However, Borges believes that cybersecurity companies will be able to weather the storm.
"Many enterprises and small businesses rely on Microsoft to provide a baseline level of security, and then overlay best-in-breed providers," Borges explained. "We see cloud security as a good example of a total addressable market in which both Microsoft and third-party vendors like Palo Alto Networks, Zscaler, and (startup) Wiz are capturing growth."
Meanwhile, Microsoft has not specified a release date for the new computer network SSE products. Microsoft also did not reveal pricing.