What happened

Unexpectedly good news had unexpectedly bad results for cybersecurity stocks this morning, as the December inflation report came in at 6.5% -- the slowest year-over-year increase since October 2021. Ordinarily you'd expect this to be good news for stocks, as it may suggest to the Federal Reserve that it need not raise interest rates quite so high, or quite so often as it has been, to combat runaway inflation.  

Regardless, stock markets opened lower on Thursday, and cybersecurity stocks were among the bigger losers. CrowdStrike Holdings (CRWD 0.13%) slumped 3.2% through 10 a.m. ET, Palo Alto Networks (PANW -1.71%) slipped 2.2%, and Fortinet (FTNT -2.17%) dropped 2.6%.

So what

That growth stocks like CrowdStrike, Palo Alto, and Fortinet would sink on news that implies less growth-slowing, interest rate-hiking activity by the Fed is a bit counterintuitive. That being said, there was some moderately bad news for the cybersecurity sector this morning that may explain the declines.

Following up on Wednesday's $1 Fortinet price target cut by Barclays (which cut the stock to $56 a share), this morning fellow investment bank Morgan Stanley announced it is lowering price targets on CrowdStrike and Palo Alto Networks as well. Citing "meaningfully downticked" sales activity in cybersecurity in October, Morgan Stanley warned investors in the cyber sector to brace for analyst downgrades of earnings forecasts over the next couple of quarters, reports ratings-watcher The Fly.  

The bank reduced its price target for CrowdStrike by 22%, to $135 per share, and cut Palo Alto by 18%, to $220 per share.

Now what

That sounds bad, and it may even be the reason why all three of these cybersecurity stocks are trending lower today. And yet, consider what else Morgan Stanley said about these stocks in today's note. Specifically, the bank said it has "strong confidence" in Palo Alto Networks -- its "top pick" in the cyber sector -- and that it is "buying this dip" in CrowdStrike as well.

In fact, Morgan Stanley reiterated buy ratings on both CrowdStrike and Palo Alto Networks. As the analyst reasons, because cybersecurity is a major concern among corporate IT departments these days, cybersecurity is "by far the least likely area of IT spend to be cut," even if companies do decide to generally roll back tech investments in 2023.  

That reasoning makes sense to me. I also agree with Morgan Stanley's two top picks in this sector -- and the order in which it picks them. Valued at a mere 17 times trailing free cash flow, and with consensus estimates forecasting 29% long-term earnings growth, Palo Alto Networks looks obviously cheap to me. Earnings growth revisions -- if they happen as Morgan Stanley says they will -- would have to cut Palo Alto's growth rate in half to erase this stock's margin of safety.

CrowdStrike, too, at under 36 times FCF and a 31.5% projected growth rate, is starting to look attractive as it approaches fair valuation. Likewise Fortinet at 32 times FCF and a 23.4% projected growth rate.

But if you're looking to buy the hands-down cheapest bargain in this sector, I still think Palo Alto Networks is that stock.