AI-driven improvement in cybersecurity spending trends! Sector valuations gain support as Citi raises price targets on Palo Alto Networks (PANW.US) and other stocks.

Citi said in a research report released recently that its latest Chief Information Officer (CIO) survey shows cybersecurity spending trends have improved, with cybersecurity budget growth accelerating to 7% over the next 12 months (NTM), while AI deployment has clearly become a catalyst driving security investment growth. Enterprises appear to be broadening their focus from security protection to protecting expanding cloud computing assets and managing an increasingly complex, multi-layered attack surface. Cybersecurity remains the top destination for enterprise tool consolidation. In Citi's view, this benefits scaled platform vendors such as Palo Alto Networks (PANW.US) and CrowdStrike (CRWD.US). At the same time, tailwinds from agentic technology are emerging, but they are still at an early stage, so the competitive landscape and ultimate winners remain to be determined, with Okta (OKTA.US) in an enviable position. Against this positive survey backdrop, Citi raised price targets on some cybersecurity companies, reflecting improved cybersecurity spending indicators, greater confidence in sector-specific tailwinds, and ultimately higher confidence in upside to earnings forecasts over the next 12 months. Cybersecurity budget trends show acceleration Overall, cybersecurity spending growth has improved, with cybersecurity budget growth accelerating by about 1 percentage point to about 7% over the next 12 months; enterprise AI investment is clearly driving cybersecurity spending growth, with 82% of CIOs saying enterprise AI investment is increasing cybersecurity spending, up from 71% previously. Although cybersecurity still trails the top-ranked data analytics/generative AI in terms of investment priorities over the next 12 months, the gap between the two has narrowed to 3 percentage points from 10 percentage points in the previous quarter. Meanwhile, cybersecurity remains the top area for enterprise tool consolidation, with the proportion of CIOs choosing this area rising 4 percentage points to 37%; cybersecurity spending as a share of overall IT budgets remained at about 9%. Cloud security, identity security, and vulnerability management/exposure management become top investment priorities In Citi's survey, cloud security, identity security, and vulnerability management/exposure management (VM/EM) became the main investment priorities within cybersecurity. In terms of entering the top three priorities, cloud security reclaimed the top spot, while VM/EM also rose markedly in the rankings. Unlike the previous quarterwhen identity security, endpoint security, and web security dominated the highest-priority choicesCIOs this quarter appeared to allocate more evenly across foundational security control layers including cloud security, identity security, network security, and VM/VA/EM. Citi still believes identity security is a key architectural control point in an increasingly evolving agentic environment. However, the survey shows enterprises are broadening their focus beyond identity-centric spending to protecting expanding cloud assets and improving overall security posture management. In Citi's view, the resurgence of VM is particularly noteworthy, likely reflecting growing enterprise attention to reducing exposure, remediation workflows, and attack surface management as enterprises grapple with larger AI-enabled environments and rapidly growing infrastructure complexity. From the perspective of overall market attention, VM/EM has also recently become a hot topic (including executive orders, broader C-suite awareness of the issue and related concerns, and technological advances at major labs bringing the issue into focus), and Citi believes these factors may together have driven the rapid rise of this broader sub-sector. Hyperscalers still have an advantage in cloud security purchasing decisions, but overall, Microsoft Corporation (MSFT.US), Palo Alto Networks, and CrowdStrike have clearly emerged as the main beneficiaries of customer wallet share across technology stack spending allocations. Higher valuation multiples Citi noted that the acceleration in cybersecurity spending shown by hard data has alleviated sector valuation fatiguethe sector has already re-rated significantly, with a current NTM EV/sales (EV/S) of 22x, compared with 10x six months ago and 14x a year ago; aside from a few exceptions, meaningful earnings forecast upgrades have been limited. However, clearer and multi-faceted evidence that cybersecurity budgets and industry growth will remain strong for longer gives the bank reason to raise terminal valuation multiples. The bank modestly raised terminal multiples on a company-by-company basis to reflect its confidence that budget acceleration will ultimately higher structural growth, and the related evidence, especially for cybersecurity leaders. This judgment is built on the bank's base view that the combination of the following factors will keep a relatively high valuation floor under the entire cybersecurity sector: 1) low/minimal lab and AI disintermediation risk; 2) attractive thematic investment exposure; 3) asset scale and fundamental scarcity value; 4) these companies are essentially becoming an "insurance policy" against AI risk. Specifically, Citi raised its price target on Palo Alto Networks to $440 from $410, with a "Buy" rating; raised its price target on CrowdStrike to $295 from $260, with a "Buy" rating; raised its price target on Okta to $215 from $205, with a "Neutral" rating; and raised its price target on Zscaler (ZS.US) to $260 from $245, with a "Buy" rating.