Microsoft CEO Satya Nadella speaks during a keynote address announcing ChatGPT integration for Bing at Microsoft in Redmond, Washington, Feb. 7, 2023.
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Cloudflare, Palo Alto Networks and Zscaler shares all declined Wednesday after analysts noted Microsoft's entry into a part of the cybersecurity market where those three smaller companies already compete. Palo Alto and Zscaler shares both slid about 7%, while Cloudflare shares fell 5.5%.
Analysts emphasized that the new Microsoft Entra Internet AccessandMicrosoft Entra Private Access products are in the preview stage, with no pricing details available. But over time, they could strengthen Microsoft's campaign to make security one of its top categories, as older areas such as Windows recede.
In 2022, Microsoft's security revenue exceeded $20 billion, up about 33% from the prior year. CEO Satya Nadella said in a recently disclosed memo that the company's Security, Compliance, Identity and Management business could reach $100 billion in revenue by the 2030 fiscal year.
The new Entra products, along with the existing Microsoft Defender for Cloud Apps, fall under a category known as Secure Service Edge. SSE involves providing cloud tools that help corporate workers securely access applications hosted in the cloud and on premises, Joy Chik, Microsoft's president of identity and network access, wrote in a Tuesday blog post.
The Microsoft Entra Private Access service offers an alternative to long-standing virtual private networks, or VPNs, which let employees access internal programs while working remotely. Microsoft Entra Internet Access can help security administrators control employees' connections to cloud apps, including Microsoft 365 applications such as Teams.
Analysts at Jefferies, with a buy rating on Microsoft stock, said the move could have "potential longer term ramifications" to Cloudflare, Palo Alto and Zscaler, as well as Fortinet and Check Point Software.
"This is potentially the largest and last major cybersecurity market that Microsoft has yet to enter and it is now competing with cloud network security providers, mainly ZS, NET, PANW," Morgan Stanley analysts led by Hamza Fodderwala wrote in a Tuesday note. Still, they said gaining meaningful market share in SSE could prove more difficult than in other parts of security because of a lack of structural tie-ins with Microsoft software. The company has gained adoption in endpoint security through Windows and identity products due to integrations in its email software.
"The same presence doesn't exist for network security/SASE, which we think is more complex given the need to enforce policy in heterogeneous environments," wrote the analysts, who have the equivalent of a buy rating on Microsoft shares.
Analysts at UBS, with a hold rating on the stock, said Zscaler's 4.5% downward move Tuesday appeared to be "overdone, especially when considering ZS's near-exclusive focus on the enterprise segment and the expectation that the initial Microsoft Security Edge solution will be primarily aimed at SMBs."
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