The technology sector is set to outperform again in 2024, with cybersecurity and cloud networking stocks among those best positioned, according to Barclays.
A major catalyst: artificial intelligence.
But it’s not necessarily a rinse-and-repeat for Wall Street. Investors should look beyond chipmakers like Nvidia (NVDA) to some of the tech industry’s lesser-known plays, and here’s why: Year two of the generative AI boom will likely serve as a reality check for the industry as companies focus on expanding use cases and mitigating risk.
“It will be about using AI in different ways,” Barclays senior technology hardware and networking analyst Tim Long told me at the Barclays Global Technology conference last week. “We have yet to really see the rest of the build-out.”
Higher interest rates and fears of a spending pullback slowed the group’s momentum this year. Heading into the final two weeks of the year, the industry has lagged the broader tech rally year to date, with the Nasdaq CTA Cybersecurity Index (^NQCYBR) rising 39% compared to the Nasdaq 100’s (NDX) 53% gain.
The gap in performance may be set to narrow soon as companies spend more to protect against the threats posed by AI. Research firm Gartner forecasts corporate spending on cybersecurity to climb 14% next year to $215 billion.
The environment feels “more stable,” explained Barclays senior software analyst Saket Kalia, who sees cloud security and secure access service edge (SASE) as top investment themes for 2024. His top picks include CrowdStrike (CRWD) and Gen Digital (GEN).
“CrowdStrike isn’t just a great growth story within security, there’s strong free cash flow support and it’s diversifying its business,” Kalia added. “It reminds me of Palo Alto Networks 18 to 24 months ago … Investors appreciate diversification and I think that’s what will keep the CrowdStrike story going in 2024.”
CrowdStrike’s share price is up 150% this year.
Gen Digital, formerly NortonLifeLock and Avast, is another top pick for the Barclays team. The security and identity protection provider reported 27% revenue growth in its fiscal second quarter, driven by a year-over-year surge in bookings.
“This company’s operating margin is nearly 60% … and it’s trading at a really palatable valuation,” Kalia explained.
Gen Digital is among the lackluster performers of the group, with shares only rising 7% year to date.
Beyond pure cybersecurity plays, Barclays’s Long sees Arista Networks (ANET) as a top pick amid the AI craze.
“Arista Networks is the leading AI play. They make switches and routers — the networking element of these data centers — and normally that’s 10% or so of the spend in AI data centers,” Long explained.
In the company’s third quarter earnings call, CEO Jayshree Ullal called out demand from the new technology, noting customers have “clearly prioritized and doubled down on AI this year.“