Zscaler & peers shares drop amid Microsoft competition worries

Following Microsoft’s (MSFT) announcement of new services in the cybersecurity sector, shares of cybersecurity software companies are experiencing a decline today.

Microsoft revealed its entry into Secure Service Edge (SSE) by introducing Microsoft Entra Internet Access, which serves as a Secure Web Gateway for web/SaaS apps, and Microsoft Entra Private Access, providing Zero-Trust Network Access for private and internal apps.

Analysts suggest that this move has the potential to pose a competitive threat to established players in the industry, despite Microsoft’s offerings being in their early stages.

According to Morgan Stanley, Microsoft is now entering what could potentially be its largest and final major cybersecurity market. In this market, it will be competing with cloud network security providers, particularly Zscaler (ZS), Cloudflare (NET), and Palo Alto Networks (PANW), which saw their share prices drop more than 6%, 5%, and 7% today, respectively.

While noting that Microsoft possesses advantages such as its “massive network” and “ample capacity to invest”, Morgan Stanley believes capturing a substantial market share in this particular segment of the security market will be more challenging compared to others. This is because it is “less synergistic with the existing Microsoft estate”.

According to UBS, although this is negative for the vendors, the negative market reaction to Zscaler shares today seems exaggerated. This is particularly true when taking into account that Zscaler primarily targets the enterprise segment, while the initial Microsoft Security Edge solution is expected to primarily cater to SMBs.

Instead, the firm sees this as a bigger risk for vendors with SMB exposure, including Cloudflare and potentially Fortinet (FTNT).

By Davit Kirakosyan