What happened
One day after really taking it on the chin from the stock market, cybersecurity companies bounced back convincingly on Thursday. Zscaler (ZS 2.16%) and Cloudflare (NET 1.26%) both zoomed to close more than 5% higher, while Palo Alto Networks (PANW +2.78%) rose by almost 3%. All three handily beat the 0.9% increase of the S&P 500 index on the day.
So what
It's often been said that securities markets tend to overshoot and overreact on impactful news, and that very much appears to have been the case with the cybersecurity companies.
Wednesday's sell-off was entirely understandable, though; it was a very bearish reaction to the news that Microsoft (MSFT 0.68%) plans to compete in the crucial secure service edge (SSE) segment of the cybersecurity market.
Microsoft's size, reach, and power dwarf that of the much smaller cybersecurity specialists. To cite only one metric, the company's market cap currently stands at more than $2.5 trillion -- more than 100 times that of Zscaler.
Yet while it's an intimidating competitor, Microsoft is fallible. In the past, it has plowed mountains of capital into certain tech segments, with ultimately not much to show for its efforts. For instance, its Bing search engine remains far behind Alphabet's Google in terms of popularity, while in the hardware field, its attempt at Apple iPod-like success fell flat with the best-forgotten Zune lineup of music devices.
Companies like Zscaler, Cloudflare, and Palo Alto Networks are cybersecurity providers that are battle-tested in the market, and generally have good reputations. They have also proved that they can grow as businesses and in net profits in this very competitive field. For all its advantages, Microsoft will have to convince clients and investors that its offerings are superior in some way.
NASDAQ: ZS
Key Data Points
Now what
There is already some skepticism from market professionals that it can do so. On Wednesday before market open, JMP Securities analyst Trevor Walsh said that Microsoft is attempting to compete from behind.
Referring to the tech giant's declaration that it is pushing into SSE, he wrote, "While we believe this is an interesting announcement and one to watch, MSFT security tools, whether endpoint, identity, etc., are generally viewed as 'good enough' and nothing near best-of-breed solutions."
It seems investors were thinking along the same lines on Thursday. Regardless of how effective Microsoft ends up being in the cybersecurity segment, though, it undeniably represents a competitive threat. Shareholders of any cybersecurity stock should watch the company's moves in this realm closely.
