According to a recent research report released by Citi, the bank's latest Chief Information Officer (CIO) survey shows that cybersecurity spending trends have improved, with next-twelve-month (NTM) cybersecurity budget growth accelerating to 7%, while AI deployment has clearly become a catalyst driving security investment growth.
Enterprises appear to be broadening their focus from pure security protection to protecting an expanding cloud computing asset base and managing an increasingly complex, multi-layered attack surface. Cybersecurity remains the top destination for enterprise tool consolidation.
In Citi's view, this benefits scaled platform vendors such as Palo Alto Networks (PANW.US) and CrowdStrike (CRWD.US). At the same time, tailwinds from agentic technology are emerging, though still at an early stage, so the competitive landscape and ultimate winners remain to be determined, with Okta (OKTA.US) in an enviable position.
Against this positive survey backdrop, Citi raised price targets for some cybersecurity companies, reflecting improved cybersecurity spending metrics, increased confidence in sector-specific tailwinds, and ultimately greater confidence in upside to earnings forecasts over the next twelve months.
Cybersecurity budget trends show acceleration
Overall, cybersecurity spending growth has improved, with NTM cybersecurity budget growth accelerating by about 1 percentage point to roughly 7%; enterprise AI investment is clearly driving cybersecurity spending growth, with 82% of CIOs saying enterprise AI investment is increasing cybersecurity spending, up from 71% previously.
Although cybersecurity still trails the top-ranked data analytics/generative AI in terms of NTM investment priorities, the gap between the two has narrowed from 10 percentage points in the previous quarter to 3 percentage points. Meanwhile, cybersecurity remains the top area for enterprise tool consolidation, with the proportion of CIOs choosing this area rising 4 percentage points to 37%; cybersecurity spending as a share of overall IT budgets remained at about 9%.
Cloud security, identity security, and vulnerability management/exposure management become top investment priorities
In Citi's survey, cloud security, identity security, and vulnerability management/exposure management (VM/EM) became the most important investment priorities in cybersecurity. From the perspective of entering the top three priorities, cloud security reclaimed the top spot, while VM/EM's ranking also rose notably.
Unlike the previous quarter—when identity security, endpoint security, and web security dominated the highest-priority choices—CIOs this quarter appeared to allocate more evenly across foundational security control layers including cloud security, identity security, network security, and VM/VA/EM.
Citi still believes identity security is a key architectural control point in the increasingly evolving agentic environment. However, the survey shows enterprises are broadening their focus beyond identity-centric spending to protecting expanding cloud assets and improving overall security posture management.
In Citi's view, the resurgence of VM is particularly noteworthy and may reflect growing enterprise attention to reducing exposure, remediation workflows, and attack surface management as enterprises grapple with larger AI-enabled environments and rapidly growing infrastructure complexity.
From an overall market attention perspective, VM/EM has also recently become a hot topic (including executive orders, broader C-suite awareness of the issue and related concerns, and technological advances at major labs bringing the issue into focus), which Citi believes may collectively have driven the rapid rise of this broader subsegment.
Hyperscalers still hold an advantage in cloud security purchasing decisions, but on the whole, Microsoft (MSFT.US), Palo Alto Networks, and CrowdStrike have clearly emerged as major beneficiaries of customer wallet share across overall technology stack spending allocation.
Higher valuation multiples
Citi noted that the acceleration in cybersecurity spending shown by hard data has alleviated sector valuation fatigue—the sector's valuation has already repriced significantly, with a current NTM EV/sales (EV/S) of 22x, compared with 10x six months ago and 14x a year ago; aside from a few exceptions, meaningful earnings forecast upgrades have been limited.
However, clearer and multi-pronged evidence that cybersecurity budgets and industry growth will remain strong for longer gives the bank reason to raise terminal valuation multiples. The bank modestly raised terminal multiples on a company-by-company basis to reflect its confidence that budget acceleration will ultimately translate into higher structural growth, along with related evidence, especially for cybersecurity leaders.
This judgment is built on the bank's fundamental view that the combined effect of the following factors will keep the entire cybersecurity sector at a relatively high valuation floor: 1) lower/minimal risk of lab and AI disintermediation; 2) attractive thematic investment exposure; 3) asset scale and fundamental scarcity value; and 4) these companies are essentially becoming "insurance policies" against AI risk.
Specifically, Citi raised its price target on Palo Alto Networks to $440 from $410, maintaining a "Buy" rating; raised its price target on CrowdStrike to $295 from $260, maintaining a "Buy" rating; raised its price target on Okta to $215 from $205, maintaining a "Neutral" rating; and raised its price target on Zscaler (ZS.US) to $260 from $245, maintaining a "Buy" rating.
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