Analysis: MSFT PANW CSCO

The recent choppy behavior in the market continues Wednesday as all the major U.S. indices are trading lower at the time this was written. This push-and-pull nature of the market action is why we continue to maintain our larger-than-usual cash position as we seek to put incremental amounts of capital to work on down days. Nothing is in our buy range just yet as many stocks are still working through Tuesday's session gains, but we remain watchful of opportunities.

Microsoft

Checking in on some stocks, Microsoft (MSFT) received multiple positive reviews following the recent Build developer conference, with analysts at UBS coming out positive on the growth prospects of cloud gaming and Office 365 while noting their view that margins will continue to "work higher." Additionally, analysts at Oppenheimer noted that at the Build conference "it became obvious that the company has totally restructured itself around the intelligent edge cloud. It is now better positioned to create and drive new services through developer partnerships."

Furthermore, the analysts at Oppenheimer stated, "we believe that Microsoft is at the epicenter of enterprise cloud adoption, steering customers toward the next 20-year wave of computing-which we are calling Intelligent Fog-through heavy investment in hybrid (Azure Stack), Internet of Things (IoT), artificial intelligence (AI), and blockchain technologies. Fog will be more decentralized and will enable computers to become seamless assistants to people (more powerful compute/AI in our pockets)."

Bottom line, despite hovering near all-time highs, we remain bullish on the opportunity ahead and continue to view Microsoft as a key player in the secular cloud growth space.

Palo Alto Networks

Looking in on Palo Alto Networks (PANW) , this stock hasn't done much recently as Morgan Stanley pointed out in a research note today. In their research note, they mention how the shares are down 3% over the past month compared to a 4% gain in the security software group and a 6% advance in broader software. In fact at the time this was written, the stock was down more than $14, or nearly 6%, from the price of our most recent trim here and almost $25, or nearly 10%, from when we trimmed into strength in reaction to the company's previous earnings release.

But with Palo Alto's earnings coming up next week, let's check in and see what some analysts are saying about the stock.

First off, Morgan Stanley thinks the cause of the stock's relative underperformance can be mainly attributed to "concerns around much tougher 2H compares amid a broader CQ1 [calendar quarter 1] slowdown in security spend." They said this dynamic, "has likely renewed investor concern regarding the prospect of a slowdown in network security spending in 2019."

But Morgan Stanley's channel conversations tell a different story and suggest "refresh activity within Palo Alto Networks' appliance base is expected to remain strong through at least 1H of CY19...with potential for sustained growth into 2H/CY20." That's similar to what Deutsche Bank analysts wrote on May 16 when they said, "the stock may be signaling a pending slowdown, but our checks continue to sound strong on PANW."

Now Morgan Stanley did acknowledge that there might have been a January slowdown due to various macro noise, trade factors, and digestion, but ultimately, they view this as a thing of the past. Supporting this view was the success and amount of activity competitors had in the first quarter, namely from Cisco (CSCO) . That fits what JMP wrote about the Cisco quarter and how the organic growth in security from the Chuck Robbins-led company "suggests to us that cybersecurity demand is relatively healthy."

Cisco is always an intriguing comparison because if we go back to Piper Jaffray's Palo Alto Networks earnings preview that was published this past Monday, the analysts referenced their end-of-quarter Security Reseller survey that had 39% of vendors saying Cisco was the most frequently displaced vendor being beat by Palo Alto. In other words, think of Palo Alto as a market-share gainer in the category.

But when we look at how Cisco fared in its quarter, it is important to remember that year-over-year security revenue growth accelerated sequentially to +21% (although estimated to be closer to 12%-13% excluding the Duo acquisition, per Deutsche Bank).

Bottom line here, our takeaway is that we think this all suggests that there is plenty of spending in cybersecurity to go around. The need for cybersecurity-related solutions is simply too great, especially considering that it was collectively viewed as the number one risk to the United States financial system, according to several chief executives of the country's largest banks.

Now not every analyst has been bullish on Palo Alto Networks. As we mentioned last week in our Weekly Roundup here, Mizuho cautioned last Wednesday that their checks show "more subdued levels of product demand." PANW fell more than 3% on the day Mizuho's note was published. It's the first take we have seen that was cautious about demand trends, and we'll monitor for any other bearish comments ahead of the print.

We'll follow up on Palo Alto Networks again closer to its earnings release. The company is set to report next Wednesday, May 29, after the closing bell.