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Cybersecurity stocks are beating the market amid volatile economy

CrowdStrike IPO on the Nasdaq Exchange on June 12, 2019.

Source: Nasdaq

Economic concerns were a major theme across the tech industry during the second quarter earnings season, as companies warned about slowing spending on advertising, gadgets, e-commerce, and software.

But as interest rates rise and inflation remains at its highest level in 40 years, demand for cybersecurity, part of the tech sector, is still soaring.

Earnings reports from CrowdStrike and SentinelOne this week pleasantly surprised Wall Street, and the companies, which specialize in protecting the millions of devices connected to corporate networks, boosted their forecasts for the year.

“Cybersecurity is not a discretionary item,” CrowdStrike CEO George Kurtz said on the company’s earnings call.

Investors heard similar comments last week from Palo Alto Networks, which reported its first profit in a decade. The data center security firm’s stock price surged 12% for him, the best performance since his IPO in 2012.

And two weeks ago, Cisco announced that its security business was growing faster than all other segments, beating analyst estimates by about $100 million. Security is currently Cisco’s biggest investment area, CEO Chuck Robbins told analysts on a conference call, as the company raised prices to combat rising costs of the components needed to assemble the hardware. We are increasing our staff.

Across the security landscape, vendors are busy providing tools to large corporations concerned about remote work, the hybrid phenomenon, and vulnerabilities that have emerged due to the rise in cyberattacks being waged while Russia is at war in Ukraine.

Palo Alto Networks CEO Nikesh Arora said on a conference call with analysts: “Security spending is tied to our customers’ desire to move to the cloud, facilitate more direct customer relationships, modernize their IT infrastructure, and drive efficiencies while adapting to new ways of working. These efforts are continuing.”

Investors haven’t made money betting on security this year, but they’ve lost less than betting on the broader technology market.

First Trust Nasdaq and Global X (ticker symbol BUG) cyber-focused ETFs are down 22% and 19% respectively in 2022. Nasdaq is down 25% for the year.

cyber stocks and nasdaq

CNBC

Within software, security providers demonstrate the advantages they can enjoy during times of economic turmoil. Clients cannot cut back on spending given the myriad of threats they face and the risk to their business if they are hit by a large-scale ransomware attack. So they are looking elsewhere.

Last week, cloud software maker Salesforce said it lowered its guidance for the fiscal year to encourage customers to buy more cautiously. Stocks fell 11% in his next three trading sessions. Zoom’s stock price also plummeted after video-calling software company Zoom lowered its full-year forecast.

Elsewhere in technology, ad-supported businesses such as Snap and Facebook have been hit, while online commerce companies Shopify and Affirm have warned of a return to pre-corona spending patterns. Even Apple CEO Tim Cook said the iPhone stock index is seeing “a soft spot” as fears of an economic slowdown permeate.

Splunk CEO Gary Steele said in an interview this week: “I think we saw the macro situation where the budget seemed tight, meaning we had to make decisions about when we wanted to do something.”

Watch Jim Cramer's full interview with Splunk CEO Gary Steele

CrowdStrike’s second quarter revenue increased 58% year over year as it signed up more than 1,700 subscribing clients, more than the previous quarter. Burt Podbere, head of finance at CrowdStrike, said the company is enjoying “strong industry tailwinds.”

Kurtz told analysts that some deals are taking longer as clients are forced to obtain higher levels of necessary approvals before purchasing. But they are still happening. Jefferies was one of several banks to raise CrowdStrike’s price target, and analysts at the firm said the company should be reasonably protected in the event of a downturn.

SentinelOne CEO Tomer Weingarten touted his company’s record gross margin and customer retention.

“Cybersecurity is a top priority for corporate IT spending and a must for every business.

Palo Alto’s Arora said customers signed long-term contracts during the quarter. This is consistent with comments from Guggenheim analysts. Guggenheim analysts wrote in a note to clients that the companies they target have not relaxed their security spending as much as their IT spending.

Not all companies in this field are popular.

Okta’s share price rose after secure sign-on software provider Okta cited a “weakening economy” and said it was struggling to integrate sales reps from its $6.5 billion acquisition of Auth0 last year. It fell 33% on Thursday.

“Integration is always difficult and affects every part of the organization,” CEO Todd McKinnon said on the earnings call. “While we are making progress, we are experiencing increasing declines within our go-to-market organizations and disruptions on the ground, both of which are impacting our business momentum.”

look: Cohesity CEO Sanjay Poonen says security and data tend to be stronger at smaller cloud companies.

Cohesity CEO Sanjay Poonen says security and data tend to be stronger at smaller cloud companies.

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