Morgan Stanley has moved Varonis Systems down a notch, reducing its rating to Equal-weight from Overweight after concluding that rising competitive pressures are likely to limit upside for the data security vendor in the near term. The bank said it still regards Varonis’ technology as differentiated, but that external dynamics have weakened the case for a sustained re-rating.
Central to Morgan Stanley’s shift is the intensifying competitive environment in data security, with Microsoft singled out as a prominent challenger. The bank said its earlier, more bullish view partly depended on expectations that artificial intelligence adoption - including Varonis’ partnership with Microsoft around Copilot - would act as a growth tailwind. That thesis has been undermined by stronger-than-anticipated activity around Microsoft’s security offerings and a more crowded vendor landscape, the bank said.
Specifically, Morgan Stanley pointed to competitive pressure from Microsoft Purview and increased activity from private vendors and backup providers. Those dynamics, the bank argued, are making it more difficult for Varonis to accelerate deal closures or materially lift win rates. As a result, Morgan Stanley does not see clear near-term catalysts to support a sustained re-rating of the stock, even as it noted that investor sentiment toward the company remains constructive.
The downgrade also reflects structural headwinds tied to Varonis’ on-premise legacy business. Varonis has announced plans to discontinue its on-premise product at the end of 2026, and Morgan Stanley estimates that roughly 25% of current annual recurring revenue still derives from legacy products and maintenance. The bank believes about half of that legacy base could transition to software-as-a-service, while it expects 5% to 10% of existing SaaS ARR not to migrate, which would weigh on overall growth.
Given those assumptions, Morgan Stanley said it is unlikely Varonis will deliver a clean 20% ARR growth cadence in the near term - a level investors had previously been targeting. The firm added that the SaaS transition, which in prior periods helped boost reported growth, is likely to act as a headwind into 2026.
Importantly, Morgan Stanley emphasized that product quality is not at issue. Channel checks, the bank said, continue to point to strong technical leadership at Varonis, although customers can take longer to recognize and adopt the benefits. To reflect its view of slower growth and a company further along in transition, Morgan Stanley trimmed its price target to $41 from $44 and shifted its valuation framework to focus on 2027 free cash flow.
The bank also flagged potential risks to its revised target, noting that broader macroeconomic conditions and competition across the data security market remain important variables that could sway outcomes.
Clear summary
Morgan Stanley downgraded Varonis to Equal-weight from Overweight amid stronger competition - particularly from Microsoft - and concerns that a significant legacy on-premise revenue base will depress near-term ARR growth. The bank cut its price target to $41 from $44 and moved to a 2027 free cash flow valuation framework.
Key points
- Morgan Stanley lowered Varonis’ rating, citing intensified competition in data security and a more crowded vendor landscape that reduces near-term upside.
- The bank estimates about 25% of Varonis’ current ARR still comes from legacy on-premise products and maintenance; roughly half could migrate to SaaS, while 5% to 10% of SaaS ARR may not move, weighing on growth.
- Price target trimmed to $41 from $44 and valuation shifted to 2027 free cash flow to account for slower growth and an extended transition period.
Risks and uncertainties
- Market competition - Escalating pressure from Microsoft Purview and other vendors could further hamper Varonis’ ability to close deals and improve win rates, affecting the cybersecurity and enterprise software sectors.
- Migration shortfalls - If a meaningful portion of legacy on-premise ARR fails to convert to SaaS, revenue and ARR growth for Varonis will be constrained, with implications for cloud transition dynamics across enterprise IT.
- Macro sensitivity - Broader macroeconomic conditions could alter demand for security solutions and influence free cash flow outcomes, with potential impacts across software and cloud services markets.