UBS Group AG's outlook for network security in 2026: AI empowers security and identity security takes the spotlight. CrowdStrike (CRWD.US) and PaloAlto (PANW.US) still maintain a favorable position.

UBS Group AG recently released the 2026 Cybersecurity Industry Outlook report, maintaining a positive outlook on the sector. Despite a 11% decline in the sector since November 2025 (lower than the -7% of the IGV index), many core trends from 2025 are expected to continue, with enterprise cybersecurity budget growth projected to outpace overall IT growth, mergers and acquisitions trends continuing, and AI-enabled security and identity security becoming core themes. In these areas, UBS believes that CrowdStrike (CRWD.US) and PaloAlto Networks (PANW.US) are in advantageous positions within their coverage range, thanks to their leading product portfolio breadth, which is reflected in their valuation. Furthermore, AI-driven security use cases are expected to mature further, with UBS anticipating that companies like CrowdStrike and SentinelOne (S.US) may disclose Intelligent Annual Recurring Revenue (agentic ARR) data for the first time. Overall, stock selection will remain challenging, similar to 2025, with UBS believing that mid-cap stocks in the process of forming platform narratives will present the best allocation opportunities, hence the positive outlook on Okta (OKTA.US) and Zscaler (ZS.US). Segment expectations and channel research UBS's Chief Information Security Officer (CISO) survey conducted in November 2025 showed strong growth expectations in cloud security, identity security, and security operations and analytics (SecOps & Analytics) fields (62%, 59%, and 55% of respondents planned to increase related budgets, respectively), while expectations were more cautious in the areas of Firewalls (only 33% of respondents planned to increase budgets), vulnerability management, and Managed Security Service Providers (MSSP) related expenditures. These results are in line with trends observed from partners, with one partner stating that the hardware firewall market has become solely a replacement market. Looking ahead to the fourth quarter of 2025 earnings reports, the research results are mixed: there are no clear signs of budget loosening, the growth in the Firewall space continues to slow, but January's business channel reserves are generally strong. Core themes and controversies In 2025, traditional attack environment-related data highlighted challenges once again: ransomware incidents increased by 47%, and serious zero-day vulnerability attacks also occurred. Looking ahead to 2026, the core themes in the cybersecurity industry will revolve around AI for Security, Security for AI, and Identity Security Focus. AI for Security involves providing security protection for AI and utilizing AI to enhance security capabilities. Best-positioned companies within the coverage range: CrowdStrike, Palo Alto Networks, SentinelOne. Security for AI focuses on providing security protection for third-party and in-house AI/Agent deployments through robust application/model controls, alleviating enterprise pain points. Best-positioned companies within the coverage range: CrowdStrike, Palo Alto Networks, Zscaler. In terms of Identity Security, concerns surrounding AI/Agent technology intensify the need for enhanced security protection for human and non-human identities. Best-positioned companies within the coverage range: Okta, Palo Alto Networks, CrowdStrike. However, some investors are beginning to question the long-standing belief that "network security software can withstand the impact of native AI enterprises." While UBS overall expects existing enterprises to continually optimize their AI security use cases, competition between foundational model providers could still impact industry valuation multiples. Performance adjustments and valuations In 2025, cybersecurity stocks performed on par with the software industry (IGV index rose by 1%, while the cybersecurity sector remained relatively stable). However, the cybersecurity industry still enjoys a slight premium in terms of valuation: based on Enterprise Value/Sales (EV/S) calculations, the median valuation for cybersecurity companies for the next 12 months (NTM) is 5.6 times, while the software industry is at 5.0 times. UBS has revised down Tenable's (TENB.US) 2026 revenue and current billing expectations, attributing this to trends of long contract lengths and reduced prepaid bills posing short-term resistance. However, they have maintained their fourth quarter of 2025 and full-year expectations. In addition, UBS has adjusted the target price for Rapid7 (RPD.US), Cloudflare (NET.US), and PaloAlto Networks ahead of their fourth quarter of 2025 earnings reports.