Since the beginning of this year, technology stocks have been flourishing in the US market. The Nasdaq Composite Index, represented by technology stocks, has far outperformed the S&P 500 and Dow Jones during the year. Looking ahead to next year, Barclays Bank believes in its latest report that the performance of technology stocks will once again outperform other industries in 2024, with the performance of the cybersecurity and cloud computing sectors likely to be the most prominent.
Barclays stated that one of the main catalysts behind this is still artificial intelligence. But for Wall Street, next year's market may not necessarily repeat this year's story.
Barclays suggests that investors should not be limited to AI chip manufacturers such as Nvidia, but should also focus on some lesser known companies in the technology industry, as the second year of the AI boom may become a reality test for the industry as companies gradually focus on expanding AI use cases and reducing risks.
"This will involve using artificial intelligence in different ways. We haven't really seen cases of achievements in other fields yet," said Tim Long, Senior Analyst for Technology Hardware and Networking at Barclays Bank, in an interview last week
The higher interest rate levels and concerns about falling spending have to some extent slowed down the upward momentum of the cybersecurity sector this year. As time enters the last two weeks of 2023, the sector's growth this year lags behind the overall technology industry - the Nasdaq Cybersecurity Index rose 39% this year, while the Nasdaq 100 Index rose as high as 53%.
However, Barclays believes that as companies invest more funds in the future to prevent the threat posed by artificial intelligence, this gap may soon narrow. Research firm Gartner predicts that corporate spending on cybersecurity will climb by 14% next year, reaching $215 billion.
Saket Kalia, senior software analyst at Barclays Bank, explained that the environment feels "more stable", and he believes that cloud security and SASE (Secure Access Service Edge) are the top investment themes for 2024. His preferred stocks include cybersecurity companies CrowdStrike and Gen Digital.
"CrowdStrike has not only achieved tremendous growth in the security sector, but also has strong free cash flow support and is diversifying its business. It reminds me of Palo Alto Networks 18 to 24 months ago... Investors love diversity, and I believe this will continue CrowdStrike's story in 2024," Kalia added.
It is worth mentioning that CrowdStrike's stock price has risen by 150% this year.
Gen Digital's predecessors were well-known security software developers Norton LifeLock and Avast, and the stock was also another preferred target for the Barclays team. The company's recent financial report shows that its second quarter revenue increased by 27%, driven by a year-on-year surge in booking volume.
Kalia explained, "The operating profit margin of this company is close to 60%... and its transaction valuation is very reasonable."
Unlike CrowdStrike, which achieved a triple digit surge this year, Gen Digital is one of the worst performing companies in the cybersecurity sector, with its stock price only rising by 7% so far this year.
In addition to pure cybersecurity stocks, Long from Barclays Bank believes that Arista Networks, a cloud computing network equipment company, will also become a hot stock in the artificial intelligence boom next year. "Arista is a leader in the field of artificial intelligence. They produce switches and routers - the network elements of these data centers, which typically account for about 10% of AI data center expenses," explained Long.
At the third quarter earnings conference call of Arista Networks, CEO Jayshree Ullal mentioned strong demand for new technologies and pointed out that customers "are clearly prioritizing and doubling their emphasis on artificial intelligence this year."
As of last Friday, Arista Networks has risen by 95% this year, far surpassing its competitors Juniper Networks and Cisco.