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Analyst expects $300B growth opportunity in cloud security

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Dan Ives, Wedbush Securities Managing Director & Senior Equity Analyst, talks cloud security market growth ahead of Biden's cybersecurity summit with big tech CEOs.

Video Transcript

- Our next guest here says that it could amount to about $300 billion in opportunity, now up for grabs among those companies battling for some of these contracts here. And for more on that, I want to bring on Dan Ives, Wedbush Securities Managing Director and Senior Equity Analyst joins us on the phone.

And Dan, good to be chatting with you again here. I mean, when we talk about how much opportunity still exists, it is interesting, maybe, to point out that these cyber security companies, the stocks themselves, have been on quite the run. I'm thinking about Zscaler as one, up 90% over the last year, up even more if you zoom out a little bit more than that.

But talk to me about how much maybe some of that opportunity hasn't necessarily been priced right when you think about valuations in some of these names.

DAN IVES: Yeah, I did tell you I covered the industry 20 years. This is the strongest growth we've ever seen. It's almost a perfect storm of demand in terms of moving to the cloud. We're only about a third of the way through that. And then these hacks that are happening, not just on the enterprise, but of course, on the federal side. You have the SolarWinds, and of course Colonial Pipeline.

It's a $300 billion market, in our opinion. Of course, companies like Zscaler, you have names like CyberArk, Telos, Fortinet, and others. We view this sort of as a Golden Age for cybersecurity. And I think this summit just speaks to what we're seeing today in terms of the nation state attacks and cyber war that ultimately is a huge opportunity for these vendors.

- Let's stick with Zscaler, too, there. We're showing it on the screen here. As I said, up about 90% over the one year time horizon. Your target is $240. The stock is above that right now. So I wonder, as big as the opportunity is, it seems like over the last few years, as we've seen these attacks rise and rise, investors have been kind of backing that into maybe where to put their money here.

These stocks were also up pretty significantly, even during the bad days of the pandemic, when the market was down. So it does seem like people are expecting that threat to rise and continue. But I mean, are these maybe overvalued now as we look at the price?

DAN IVES: Let's take Zscaler as a good example. I mean, bull case for that is $300. And I think what you're going to start to see, I think you saw with saw SolarWinds this week. Is that the Street is still underestimating what I see as just the transformative growth that we're seeing for cybersecurity across the sector.

And even names like-- of course you talk about Palo Alto as one where-- that's a company that had trouble for a few years. Now they're starting to really get their sea legs back. I think what we're really starting to see is just almost a second, third inning of not just the cloud story playing out, in the benefits in terms of cyber security, Zscaler and CrowdStrike front and center.

But also, I think a big focus today is the federal opportunity. Names like Telos, Palantir. I mean, I cannot really underscore the threat level facing the federal side, and I think this really creates the opportunity for the cybersecurity companies, the software names that protect the infrastructure.

- I mean, the other interesting thing here is this kind of, how much power the government has to kind of mandate increasing security protocols here. And maybe that's kind of the reason for the meeting that we're seeing play out today, is kind of discussing what more should be done, and what more should be mandated is done when it comes to kind of fixing some of these issues.

And of course, we're talking about Tim Cook talking a deal and not necessarily the other names that we've talked about on the cybersecurity front when it comes to the leaders of CrowdStrike and the cybersecurity companies we were just talking about.

But when it comes to that, I mean, talk to me about what you see as maybe the guarantee of some of these standards rising now, as we've seen so many attacks, and what the government is going to say these companies have to put in place to fix it.

DAN IVES: It's a great question, because this also goes back to the Biden executive order in May around cybersecurity. But that's only part of it. Because it can't happen unless you have Amazon, and Jassy, and Microsoft, and Nadella really sort of spreading the gospel, and making sure that these standards are implemented across the ecosystem.

And that's why Tim Cook, of course, where Apple plays so importantly in terms of that ecosystem on the cybersecurity side, you need the private sector buy-in. And that's why this working session today is so important, just given the threat level that we're seeing.

And I think the Colonial Pipeline was almost a wake up call, a black eye moment, whatever you want to call it, that I think is really going to change the industry for the future in terms of just the amount of spending, which of course, not just on the private sector, on federal. And that's extremely important what we're seeing.

- And lastly, Dan, I mean, when we talk about the opportunity, it is interesting you talk about Palantir. That's a company that's been pretty public about their resistance, reluctance, and just straight up talk that they will not work with China when it comes to that, because they disagree with everything that China does.

I wonder, how much that might be a limiting factor for some of these cybersecurity companies when it comes to national security? If, you know, an economy as large as China is basically off limits to work with, if increasingly we see the US maybe partnering or pushing some of these security companies here to maybe increase standards in the US, I mean, does that become maybe a limiting factor, or how large should maybe investors be looking at that, maybe, relative to some other sectors that could enjoy a global scale in what they're trying to achieve?

DAN IVES: Yeah, look, I think the reality is that China, obviously, from a threat level, becomes more of a worry than actually a partner here. And I think what you're seeing on cybersecurity-- it's not just Palantir, but many cybersecurity software companies, right now it's really about protecting companies in the US, globally. But of course, the infrastructure within the Beltway.

So I don't really see that as a limiting factor. I think it also just speaks to the broader US-China Cold Tech War. And this is something that I think you're starting to see the ante go up because of the types of threats that we're seeing. And I think more and more, the buy-in from the cybersecurity industry. And of course titans like IBM, Amazon, Microsoft, Apple. That's important to kind of move this forward, because this is a very serious matter when it comes to cybersecurity threats.