Geopolitical tensions are rattling the cybersecurity tape, affecting club names Palo Alto Networks, CrowdStrike and Broadcom. But they don’t change our investment dogma. Reuters reported on Wednesday that Chinese authorities have told domestic companies to stop using cybersecurity software from a handful of U.S. and Israeli companies, including Palo Alto Networks, CrowdStrike, Fortinet and Broadcom subsidiary VMware. The Chinese government cited national security concerns, saying the software could collect sensitive information and send it overseas. The ban comes as the United States has tightened controls on the sale of advanced AI chips to China, citing concerns that they could be used for military purposes. In retaliation, China told customs officials not to bring Nvidia’s low-tech H200 chip into the country and warned tech companies to only buy the chips if absolutely necessary, according to another Reuters report. The uncertainty facing NVIDIA in China, a key market for the AI chip leader, is contributing to the overall downturn in the semiconductor industry. Palo Alto’s stock price fell as much as 3% on Wednesday morning, but was back to flat by early afternoon. CrowdStrike fell 1.7% and Broadcom fell more than 4%. We will continue to work on all three. We like Palo Alto for its platforming strategy that bundles products and best-in-class technology to protect against the growing threat of advanced cyberattacks. Additionally, the company has gained an additional advantage with its recent acquisitions of identity security company CyberArk and observability company Chronosphere, which collects and analyzes data from software applications and infrastructure. The company also has limited exposure to China, which accounts for just 2.2% of its total revenue, according to FactSet, which may have contributed to the stock’s rebound. The United States has the largest share, accounting for 63%. China operations grew 6% year-on-year, while Asia Pacific sales increased 16.6% and Americas sales increased 13.3%. Palo Alto has a price target of $225 and a rating of 1. According to Bloomberg, CrowdStrike was also included in China’s ban. However, CrowdStrike representatives told media that the company does not sell products in China and the financial impact is not material. As a result, the decline in stock prices can be attributed to the overall market decline on Wednesday. We maintain our 1 rating and $550 price target as the stock remains resilient amid volatility for enterprise software groups facing AI disruption risks. Custom chip maker Broadcom earns 17% in China. Still, the U.S. remains Broadcom’s largest market with a 25% revenue share. The drop in stocks is also likely related to Wednesday’s broader pullback in the chip industry, led by Nvidia’s 2.3% decline. Jim Cramer called Broadcom a “competitive stock.” It’s still being determined whether demand for the company’s custom AI chip business is strong enough, making it difficult to accurately value the stock. The stock currently trades at a high forward price-earnings ratio of 31 times, which is in the middle of its two-year trading range. Valuations that investors are willing to pay have increased in recent years as the market has priced in AI-related growth. The company’s AI-related backlog exceeds $73 billion, which it expects to lead to accelerated revenue growth. We maintain a ‘2’ rating on Broadcom stock. This means waiting for a pullback before buying more, and the price target is $425. (Jim Cramer’s charitable trusts are long PANW, AVGO, and NVDA. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
