Our theme of Cyber Security Stocks has declined by about 17% year-to-date in 2022, compared to the S&P 500 which is down by 12%, and the Nasdaq-100, which remains down by close to 20% year-to-date. Now tech stocks, in general, are seeing a big sell-off, as rising interest rates make investors shift out of high-growth, high-multiple stocks into value and cyclical plays. For perspective, the stocks in our theme trade at a lofty price to sales multiple of close to 18x, on average, with average revenue growth over the last twelve months coming in at about 40%. However, we think that stocks in this space could be worth a look right now, for a couple of reasons.
The ongoing war between Russia and Ukraine is likely to make governments increase their defense and security budgets. We believe that ramping up cybersecurity will be a key priority as attacks in the digital space have the potential to cause significant economic damage. Governments, critical infrastructure, and business in the U.S. and Europe could be key targets of state-sponsored cyber-attacks, as Russia potentially looks to retaliate against the slew of sanctions imposed by Western powers. This could drive up demand for cybersecurity products and services offered by the companies in our theme. Now, despite the ongoing geopolitical issues, our cybersecurity stocks theme has actually declined by about 15% over the last month, potentially presenting a buying opportunity.
Moreover, the broader trend of hybrid working and the increasing adoption of cloud-based services through the Covid-19 pandemic has also been boosting demand for cybersecurity products and we expect this to continue. Big tech companies are also increasingly interested in making deals in the space. For instance, Google’s parent company, Alphabet, just announced a $5.4 billion, all-cash deal to acquire Mandiant as it looks to provide end-to-end security solutions for its fast-growing public cloud business. This could also potentially improve sentiment for cybersecurity stocks.
Within our theme, Zscaler (NASDAQ:ZS), a cloud-based security player, has been the weakest performer, with its stock down by about 34% year-to-date, due to a smaller than expected earnings beat during its Q2 FY’22 and weaker than anticipated guidance for Q3. On the other side, Palo Alto Networks stock (NASDAQ:PANW), a cybersecurity company best known for its firewalls, has been a relative outperformer, declining by just about 4% year-to-date, as its Q2 FY’22 earnings were stronger than expected, with revenue growth accelerating compared to the previous quarter.
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