Some of the top-performing cybersecurity stocks of 2023 like Palo Alto Networks and Zscaler had one thing in common: a hot trend that emerged during the Covid emergency which led to the expansion of cloud computing. Secure Access Service Edge, or SASE, took off as businesses scrambled to maintain their corporate networks after the sudden shift to remote work during pandemic lockdowns.
The lockdown era is over, but remote work and SASE are still going strong.
"It's a fast growing market," Gartner analyst Neil MacDonald told Investor's Business Daily. "That's why you see so many companies entering it. It's quickly becoming a crowded space because there is money to be made."
What Is SASE?
SASE (pronounced "sassy) emerged as a way to deal with a problem in cloud computing.
With more business apps and workloads running on distributed cloud platforms, operated by Amazon.com, Microsoft and Alphabet's Google, instead of on-premises data centers, security has become more challenging. SASE offered a faster and more cost-effective way of securing an organization's network.
In the long run, a new form of cloud computing will boost SASE. Edge computing extends cloud services closer to where data is generated from sensors or other devices. With the rise of self-driving cars and other edge computing apps, the goal is to process and analyze data locally in real time while still connected to the internet cloud.
Critical Technologies For SASE
SASE involves two critical technologies. Security service edge (SSE) refers to creating a unified security system for a network. Zscaler, the biggest SSE provider by revenue, dominates the market.
The San Jose, Calif-based company provides cloud-based services via 150 data centers worldwide. Zscaler's web security gateways inspect customers' data traffic for malware. The company is known for its Zscaler Private Access, or ZPA cloud service, which replaces virtual private networks, or VPNs.
The other technology, software-defined wide area networking, also known as SD-WAN, focuses on maintaining an efficient and secure network and serves as a replacement for private telecom services going to branch offices.
Zscaler has partnered with several SD-WAN providers. Early this year, the company strutted out a new appliance with SD-WAN functionality that could be used at branch offices.
Among cybersecurity stocks, companies like Palo Alto, Fortinet and Check Point Software Technologies have all acquired SD-WAN vendors.
The cybersecurity industry has long been focused on firewalls as a key defense technology. But cloud computing and SASE have led to a shift.
Gartner's MacDonald noted that firewalls are "a $16 billion market but growing only 10% over the next few years." "If you're a big vendor in the hardware firewall market looking for growth, the answer is SASE," he said.
In addition, analysts point to a synergy between SASE and "zero trust." The cybersecurity model enables firms to verify the identities of network users and manage access to applications. Gartner projects the Zero Trust Network Access market to grow to $2.82 billion in 2025, up from $1.04 billion in 2022.
"Zero trust is absolutely being baked into SASE architecture," Gartner's MacDonald said.
Cloud Computing Changes Security
Gartner says the SASE market grew 35% in 2023 to about $9 billion. The research firm expects the SASE market to grow at an average annual rate (CAGR) of more than 30% through 2027.
SASE players include networking giant Cisco Systems, Cloudflare, Juniper Networks and Akamai Technologies.
"We continue to view SASE as a very competitive market in which discounting from larger vendors in the space also continues to muddy the market," said Jefferies analyst Joseph Gallo in a report.
Palo Alto Gaining Share In SASE?
At Wells Fargo, analyst Andrew Nowinski said in a report: "Palo Alto is seeing strong demand for its Prisma SASE solution, as interest in SASE is going more mainstream."
At a recent UBS financial conference, Palo Alto Chief Executive Nikesh Arora pointed to SASE as an important new approach to cybersecurity in the cloud era.
"When everything was going back to the data center, you had a big box there," Arora said. "Now everything is distributed between public cloud, between remote access from home. So you have a new network topology, a distributed topology. So you will see in the next five to 10 years that SASE, as we know it, is going to become bigger and bigger. Hardware as we know it is going to become smaller and smaller and more software firewalls will kick in."
Market estimates vary. Dell'Oro Group estimates that the SASE market will top $8 billion in 2023, growing more than 30%.
"Enterprises know they need to continue to invest for the future that will have hybrid work and cloud-based applications as the norm, and for many, SASE is the right approach," said Dell'Oro analyst Mauricio Sanchez, in a report.
A Goldman Sachs report estimated the SASE market at $9.4 billion in 2022. Goldman Sachs forecast 24% average annual growth from 2022 to 2027.
Cybersecurity Stocks: A Battle Has Begun
Palo Alto Networks is expected to play a leading role in the scramble for market share in SASE.
Goldman Sachs analyst Gabriela Borges said the company is "leveraging its leadership in next-gen (virtual software) firewalls to drive thought leadership in SASE."
"Palo Alto's brand, installed base, strong go-to-market motion, and extensive network security experience helps the company capitalize on the convergence of networking and security," Borges said in a report to clients.
Another emerging player is Microsoft. In mid-2023, Microsoft rolled out its first SASE products, pressuring Zscaler stock. Analysts say it could take a few years for Microsoft to gain traction in the SASE market.
Boosted by ties to its cloud computing arm, Microsoft's cybersecurity business stood at $20 billion in 2022, growing 30% annually.
Meanwhile, startups are also eyeing a piece of the SASE market, including Netskope, Cato Networks and Versa Networks.
Growing Investor Interest In SASE
Investor interest is evident in the recent performance of cybersecurity stocks. PANW stock has jumped 116% in 2023. ZS stock has advanced 92%, while NET stock has climbed 82%.
But SASE is still in its early days of adoption, said William Blair analyst Jonathan Ho.
"There will always be a market share battle but we believe it is growing quickly enough that all of the vendors are benefiting from new projects," Ho said. "It remains to be seen how long that can sustain for but there is still a lot of greenfield opportunity."
Palo Alto's Arora underscored this point at the UBS Conference.
"I think right now we can all grow without trying to steal from each other," he said.
Follow Reinhardt Krause on X, formerly called Twitter, @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
