China’s ban on cybersecurity software roils three of our stocks — here’s our view
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Geopolitical tensions are shaking the cybersecurity tape, impacting Club names Palo Alto Networks , CrowdStrike , and Broadcom . But they’re not changing our investment theses. Reuters reported Wednesday that Chinese authorities have told domestic companies to stop using cybersecurity software from a handful of U.S. and Israeli firms, including Palo Alto Networks, CrowdStrike, Fortinet, and VMware, a subsidiary of Broadcom. Beijing cited national security concerns, as the software could collect sensitive information and transmit it abroad. The ban comes as the U.S. maintains strict controls on the sale of advanced AI chips to China, citing concerns that they could be used for military objectives. China retaliated by instructing customs agents 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 that Nvidia faces in China, a key market for the AI chip leader, has led to a pullback in the broader semiconductor industry. Shares of Palo Alto fell as much as 3% on Wednesday morning but recovered to flat by early afternoon. CrowdStrike dropped 1.7%, while Broadcom is down more than 4%. We remain committed to all three. We like Palo Alto for its platformization strategy, which bundles products and best-in-class technology to protect against the growing threat of sophisticated cyberattacks. Plus, the company’s recent acquisitions of CyberArk, an identity security company, and observability firm Chronosphere, which collects and analyzes data from software applications and infrastructure, give it an extra edge. 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 the stock recovered. The U.S. accounts for the lion’s share, at 63%. While its China business grew 6% year over year, sales in the broader Asia Pacific region rose 16.6%, and sales in the Americas increased 13.3%. We have a $225 price target and 1 rating on Palo Alto. CrowdStrike was included in China’s ban, too, according to Bloomberg . But a CrowdStrike rep told the media outlet that the company doesn’t sell products in China, making the financial impact immaterial. As a result, the stock’s drop can be chalked up to the broader market’s down session on Wednesday. We maintain our 1 rating and $550 price target, given the stock remains resilient amid the volatility in the enterprise software group, which faces AI disruption risk. Custom chipmaker Broadcom has 17% revenue exposure in China. Yet the U.S. remains Broadcom’s largest market by revenue share at 25%. It’s also likely that the stock’s decline is related to Wednesday’s broader pullback in the chip industry, which was led by Nvidia ‘s 2.3% decline. Jim Cramer has called Broadcom a “battleground stock.” We’re still determining whether demand for its custom AI chip business is strong enough, which makes it difficult to accurately value the stock. Shares currently trade at an elevated forward price-to-earnings multiple of 31, in the middle of its two-year trading range. The valuation investors are willing to pay has increased in recent years because the market has priced in AI-related growth. We expect the company’s AI-related backlog of more than $73 billion to translate to accelerated earnings growth. We maintain our 2 rating on Broadcom shares, which means we’d wait for a pullback before buying more, and a price target of $425. (Jim Cramer’s Charitable Trust is long PANW, AVGO, NVDA. See here for a full list of the stocks.) As a subscriber 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 trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
