Microsoft cybersecurity expansion poses long-term ‘ramifications’ for Palo Alto Networks, Cloudflare, others

Cybersecurity stocks fell Wednesday after Microsoft Corp. announced an expansion into network security, and rebranded its Azure Active Directory to reflect that move, which could haunt pure-play security vendors in the long term.

In a blog post Tuesday, Microsoft
MSFT,
+1.42%
announced that Azure AD will now become “Microsoft Entra ID,” as the service focuses on zero-trust ID with Entra Private Access, and an identity-centric secure web gateway with Entra Internet Access, both of which are in preview.

Jefferies analyst Brent Thill followed that with a note stating that Microsoft “has now clearly entered the network space with potential longer-term ramifications to vendors” such as Cloudflare Inc.
NET,
-5.46%,
Fortinet Inc.
FTNT,
-2.04%,
Check Point Software Technologies Ltd.
CHKP,
-1.27%,
Palo Alto Networks Inc.
PANW,
-7.03%
and Zscaler Inc.
ZS,
-6.59%.

Read: Microsoft is cutting more jobs, after laying off 10,000 earlier this year

While shares of Microsoft finished Wednesday’s session up 1.4% at $337.20, shares of Cloudflare dropped 5.5% to finish at $64.23, Fortinet shares fell 2% to $76.72, Check Point shares fell 1.3% to close at $126.19,Palo Alto Networks shares dropped 7% to close at $232.64 and Zscaler shares fell 6.6% to close at $137.68.

While not cited in Thill’s note, CrowdStrike Holdings Inc.
CRWD,
-3.09%
shares fell 3.1% to close Wednesday at $146.13, and the ETFMG Prime Cyber Security ETF
HACK,
-1.42%
finished down 1.4%.

Also read: Microsoft to work with U.K. regulators after U.S. judge clears path to Activision Blizzard acquisition

Meanwhile, the S&P 500 index
SPX,
+0.74%
rose 0.7%, the tech-heavy Nasdaq Composite
COMP,
+1.15%
gained 1.2%, and the Dow Jones Industrials Average
DJIA,
+0.25%,
of which Microsoft is a component, closed up 0.3%.

By entering the space, Microsoft expanded its cybersecurity total addressable market to upwards of $20 billion in 2022 from upwards of $15 billion in 2021, Thill said.

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