Palo Alto Networks Inc. (NASDAQ:PANW) was downgraded to 'hold' by Deutsche Bank because the cybersecurity stock owned by Nancy Pelosi could be affected by a sector-wide "consolidation down-cycle". This follows Pelosi's February 2024 purchase of nearly $1.25 million in call options of PAWN, which expire on Jan. 17.

What Happened: In its 2025 Software Outlook, Deutsche Bank predicts that the cybersecurity sector will underperform broader software this year after a strong 2024. The bank believes that the market overestimated the impact of consolidation in 2024. "We expect 2025 will remain in a consolidation down-cycle," stated Deutsche's research note dated Jan. 7.

Ahead of its expiry on Jan. 17, Nancy Pelosi's call options have a strike price of $200 apiece and the current share price of $172.83, as of Wednesday's close, is still below the strike price.

Cybersecurity consolidation is the process of centralizing and streamlining cybersecurity tools, technologies, and processes to improve an organization's security posture. The goal is to create a unified, more efficient, and cost-effective security infrastructure.

"Consolidation is no doubt a powerful force, but it's subject to cyclical peaks and troughs," the report said. The bank also said that it struggles to see fundamentals living up to last year's expansion. "We expect market preference in 2025 will tilt in favor of best-of-breed vs. best-of-suite platforms," it added.

"After a year where Security stocks outperformed Apps and Infrastructure, the overall category is more likely to underperform broader Software in 2025, in our view," the note added.

Why It Matters: Deutsche Bank cited four factors contributing to this consolidation slowdown, which include easing IT spending, a surge in AI innovation, a temporary pause in mergers and acquisitions following a July 19 outage, and increased competition in pricing.

The disruption on July 19 resulted in flight cancellations globally and impacted sectors such as banking, healthcare, and hospitality.

Despite the downgrade, Deutsche Bank acknowledged the strength of Palo Alto Networks and CrowdStrike as leading cybersecurity companies. However, the bank believes that the current market conditions favor smaller, more innovative players.

Price Action: Shares of Palo Alto advanced 2.82% over the last six months, underperforming the Nasdaq 100 index which gained 3.56% in the same period.

According to Benzinga, Palo Alto has a consensus price target of $373.63 apiece based on the ratings of 42 analysts.

The high is $450 per share issued by RBC Capital on Nov. 21, 2024, and the low is $130 apiece issued by Guggenheim on Jan. 7, 2025.

The average price target of $150 between Deutsche Bank and Guggenheim implies a 13.14% downside for PANW.

Photo courtesy: Shutterstock