Cybersecurity stocks are beating the market in a volatile economy
CrowdStrike IPO on the Nasdaq exchange on June 12, 2019.
Economic concerns were a major theme across the tech industry during the second-quarter earnings season as companies warned of slower spending on advertising, gadgets, e-commerce and software.
But with interest rates rising and inflation hovering near a 40-year high, one part of the tech sector still shows booming demand: cybersecurity.
This week’s earnings reports from CrowdStrike and SentinelOne pleasantly surprised Wall Street, and both companies, which specialize in protecting the many devices connected to corporate networks, have raised their forecasts for the year.
“Cybersecurity is not a discretionary position,” CrowdStrike CEO George Kurtz said on his company’s conference call.
Investors heard similar comments last week from Palo Alto Networks, which reported earnings for the first time in a decade. The data center security company’s stock rose 12%, its best performance since its IPO in 2012.
And two weeks ago, Cisco said its security business was growing faster than all other segments, beating analyst estimates by about $100 million. Security is now Cisco’s top investment area, CEO Chuck Robbins told analysts on a conference call, and the company is raising staff as it raises prices to offset the higher cost of components it needs to assemble hardware.
Across the security landscape, vendors are busy providing tools to large corporations worried about vulnerabilities that have emerged due to the remote working and hybrid phenomenon and a surge in cyberattacks as Russia wages war in Ukraine.
“In transformational projects, the vast majority of our customers continue to invest here, despite the anticipated near-term macro impact,” Palo Alto Networks CEO Nikesh Arora said when speaking to analysts. “Security spending is related to our customers’ desire to move to the cloud, build more direct relationships with their customers, modernize their IT infrastructure and increase efficiency while adapting to a new way of working. Those efforts continue.”
Investors didn’t make any money on the safe bet this year, but they lost less than if they had bet on the broader tech market.
Cyber-focused exchange-traded funds from First Trust Nasdaq and Global X (ticker symbol BUG) are down 22% and 19%, respectively, in 2022. The Nasdaq is down 25% for the year.
Cyber Stocks vs. Nasdaq
In the software space, security vendors are showing the advantage they enjoy in times of economic turmoil. Customers are unable to reduce their spending given the myriad of threats they face and the risks to their business if they are hit by a major ransomware attack. So look elsewhere.
Last week, cloud software maker Salesforce trimmed its guidance for the fiscal year, saying that customers have become more conscious when purchasing. The stock slipped 11% over the next three trading sessions. Shares of Zoom also tumbled after the video-calling software company reduced its full-year guidance.
Elsewhere in tech, ad-supported companies like Snap and Facebook have been slammed, while online retailers Shopify and Affirm have warned of a return to pre-Covid spending patterns. Even Apple CEO Tim Cook said the iPhone marker is seeing “pockets of softness” as fears of an economic slowdown trickle down.
“I don’t know if anyone uses the word recession,” said Gary Steele, CEO of Splunk, whose software helps companies analyze data to monitor performance and detect threats, in an interview this week. “I just think we’ve seen macro conditions where budgets seemed to be tightening, which meant they had to make a decision about when something should happen.”
CrowdStrike’s second-quarter revenue rose 58% year over year as the company added over 1,700 subscribed customers, more than in any previous quarter. Burt Podbere, CrowdStrike’s chief financial officer, said the company enjoys “strong tailwinds from the industry.”
Kurtz told analysts that deals are taking longer to close because customers are being forced to obtain a higher level of required approvals before making a purchase. But they still happen. Jefferies was one of several banks to raise its price target on CrowdStrike, and analysts at the firm said the company should be adequately protected in the event of a recession.
Tomer Weingarten, CEO of SentinelOne, touted his company’s record gross margin and customer retention rate.
“Cybersecurity remains a top priority for corporate IT spending, a must for all businesses,” he said.
Palo Alto’s Arora said customers signed up for long-term deals during the quarter. That aligns with comments from Guggenheim analysts, who wrote in a note to clients that security spending at the companies they cover hasn’t declined as much as IT spending.
Not all companies in the industry see a bang.
Okta shares plunged 33% on Thursday after the secure sign-in software provider cited a “slowing economy” and said it was struggling to onboard salespeople from Auth0, which it acquired for $6.5 billion last year .
“Integrations are always difficult and touch every part of an organization,” CEO Todd McKinnon said on the conference call. “As we make progress, we have seen increased attrition within the go-to-market organization as well as some confusion in the space, both of which have impacted our business momentum.”
CLOCK: Security and data are strong trends in small cloud companies, says Sanjay Poonen, CEO of Cohesity
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