China’s ban on cybersecurity software roils three stocks — our view
Geopolitical tensions are shaking the cybersecurity tape and affecting club names like Palo Alto Networks, CrowdStrike and Broadcom. But they do not change our investment theses. Reuters reported on Wednesday that Chinese officials told domestic companies to stop using cybersecurity software from a handful of U.S. and Israeli firms, including Palo Alto Networks, CrowdStrike, Fortinet and Broadcom subsidiary VMware. Beijing has raised national security concerns because the software can collect sensitive information and transmit it abroad. The ban comes as the United States maintains tight controls on the sale of advanced artificial intelligence chips to China, citing concerns that they could be used for military purposes. China retaliated by ordering customs officials not to allow Nvidia’s less advanced H200 chips into the country and warned tech firms to buy them only if absolutely necessary, according to a separate Reuters report. The uncertainty Nvidia faces in China, a key market for the AI chip leader, has led to a pullback in the broader semiconductor industry. Palo Alto’s shares fell as much as 3% Wednesday morning but remained flat in the afternoon. CrowdStrike fell 1.7%, while Broadcom lost more than 4%. We are committed to all three. We like Palo Alto for its platformization strategy, which brings together products and best-in-class technology to protect against the growing threat of sophisticated cyberattacks. Additionally, the company’s recent acquisitions of CyberArk, an identity security company, and Chronosphere, an observability firm that collects and analyzes data from software applications and infrastructure, give it an extra advantage. The company also has limited exposure to China — the country accounts for just 2.2% of total revenue, according to FactSet — which may be why shares have rebounded. The USA gets the lion’s share with 63%. The China business grew by 6% compared to the previous year, while sales in the Asia Pacific region increased by 16.6% and sales in the Americas increased by 13.3%. We have a $225 price target and a 1 rating on Palo Alto. According to Bloomberg, CrowdStrike was also included in China’s ban. However, a CrowdStrike representative told the media outlet that the company does not sell products in China, meaning the financial impact is negligible. As a result, the decline in the stock can be attributed to Wednesday’s bear session for the market in general. We maintain our 1 point and $550 price target as the stock remains resilient in the face of volatility in the enterprise software group at risk of AI disruption. Custom chipmaker Broadcom has a 17% revenue exposure in China. Still, the US remains Broadcom’s largest market, with a 25% revenue share. The stock’s decline is also likely related to Wednesday’s broader downturn in the chip industry, led by Nvidia’s 2.3% decline. Jim Cramer called Broadcom a “battlefield stock.” We’re still determining whether demand for the custom AI chip business is strong enough, making it difficult to accurately value the stock. Shares are currently trading at high forward price-to-earnings multiples of 31, in the middle of a two-year trading range. The valuation investors are willing to pay has increased in recent years as the market prices in AI-related growth. We expect the company’s over $73 billion in AI-related backlog to translate into accelerating earnings growth. We maintain our 2 rating on Broadcom shares, which means we’ll wait for a pullback to buy more and have a $425 price target. (Jim Cramer’s Charitable Trust, long known as PANW, AVGO, NVDA. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
