A regulatory probe in the United Kingdom into NortonLifeLock 's $8.6 billion deal with Avast and higher inflation costs are casting uncertainty over the company's stock, according to Morgan Stanley. Analyst Hamza Fodderwala downgraded NortonLifeLock to equal-weight from overweight, saying in a Tuesday note to clients that the firm sees "limited catalysts" for the cybersecurity company. NortonLifeLock is contending with both slower topline growth and greater macro risks, Morgan Stanley said. "Bottom line, the combination of slowing organic growth, uncertain macro and regulatory risk creates a tough near-term setup for NLOK," Fodderwala said. "While valuation is undemanding at 14X forward EPS and may reflect some of these risks already, we see limited catalysts to drive a re-rating in shares." Morgan Stanley maintained the $28 price target, which is just in-line with Monday's closing price for the software firm. The analyst sees potential downside risk to revenue estimates in fiscal year 2023 and 2024, should NortonLifeLock fail to increase its customer base. Despite a bump during the pandemic, higher inflation costs are expected to hurt consumer spending going forward. The outlook for NortonLifeLock also depends on its merger with Avast, the note said. A delay in the merger would likely slow any earnings per share growth. "While both scenarios could drive meaningful upside to our/consensus EPS estimates in the outer years, we think the valuation multiple could be at risk given the uncertainty around growth deceleration," the note read. Shares for NortonLifeLock dipped about 2% in Tuesday premarket trading. —CNBC's Michael Bloom contributed to this report.
