HSBC Upgrades Palo Alto Networks to Hold, Citing Recession Resilience

HSBC has revised its stance on network security stocks, upgrading Palo Alto Networks from "underweight" to "hold" while maintaining a target price of $156. The bank's analyst team, led by Stephen Bersey, cited the industry's "recession resilience" as the primary reason for this adjustment. The team highlighted that network security revenues are driven more by cyber threats than by economic cycles, making these stocks a reliable investment even during economic downturns.

The analysts noted that historical data shows that major network security companies' revenue growth has not been significantly impacted by economic fluctuations. This resilience is particularly relevant given current market concerns about U.S. tariff policies and their potential impact on the global economy. Despite these concerns, the analysts believe that the network security sector will continue to thrive due to the increasing awareness of cyber attack risks, especially amid ongoing geopolitical tensions between the U.S. and China.

HSBC's analysts also pointed out that Palo Alto Networks' contract-based revenue model provides a buffer against economic downturns. The company has over 60% of its revenue for the next 12 months already locked in through existing contracts, which helps mitigate the risk of performance volatility during economic slowdowns. This model ensures that a significant portion of the company's income is secured, providing stability in uncertain economic conditions.

Despite the upgrade for Palo Alto Networks, HSBC continues to favor Fortinet as its top pick in the network security sector. The analysts noted that while a significant portion of Fortinet's hardware is manufactured in China, over 70% of its revenue comes from markets outside the U.S. This geographic diversification helps Fortinet mitigate the impact of U.S.-led trade wars, making it a more resilient investment option. The analysts emphasized that security spending remains a critical and non-negotiable investment for businesses, regardless of economic cycles. This consistent demand for network security solutions positions Fortinet as a strong player in the market, capable of delivering robust growth even in challenging economic environments.