Cybersecurity Continues To Lead Cloud Stocks

Last June, we discussed key reasons that cybersecurity stocks would hold up particularly well compared to other cloud verticals. The analysis pointed to enterprise spending expected to increase in 2022 from the previous year, according to Chief Information Security Officer (CISO) surveys.

Considering the level of cloud spending in both 2020 and 2021, an increase on already high budgets is impressive. The CISO surveys state that 44% will increase budgets in 2022 compared to 41% in 2021 and only 2% are expect to decrease compared to 6% the previous year.

In a similar study from PricewatershouseCooper, 69% predict a rise in cyber spending for 2022 and 26% expect a surge of 10% or higher spending year-over-year. This survey was done across a broader C-suite and executive sampling.

Our analysis in June also pointed out that according to a Gartner survey, 88% of the Board of Directors viewed cybersecurity as a business risk. According to Paul Proctor, VP at Gartner, “The influx of ransomware and supply chain attacks seen throughout 2021, many of which targeted operation- and mission-critical environments, should be a wake-up call that security is a business issue, and not just another problem for IT to solve.”

We had also stated on Fox Business News that a small cohort of companies emerged this past quarter to increase the top line while also reporting narrowing losses on the bottom line. We feel not losing site of opportunities during selloffs is how generational wealth is built.

Cybersecurity Stocks Report Another Strong Quarter in 2022

In Q2, cybersecurity stocks did not disappoint with revenue beats across the board. Although SentinelOne had the largest revenue beat, Crowdstrike had the largest beat from a higher revenue base.

Source: YCHARTS

We pointed out on Twitter that one reason for the strong beats is that cybersecurity is not subject to discretionary spending.

Source: Beth Kindig

Palo Alto Networks and Crowdstrike have strong bottom lines and this is one reason both stocks have outperformed the Nasdaq this year. With that said, high growth is starting to gain traction again as SentinelOne and Zscaler have the stronger price action in the last 30 days.

Source: YCHART

In the chart below, we see a handful of cybersecurity stocks have been able to grow free cash flow, such as Crowdstrike, Zscaler and Palo Alto Networks. The strong free cash flow is occurring in addition to growing the top line, which indicates cybersecurity is not a “growth at all costs” industry.

Source: CHARTS AND INVESTOR RELATIONS

Conclusion:

Cybersecurity continues to be a top priority in budgets and the results are showing up again in Q2. We found a strong pattern with cybersecurity stocks sustaining growth rates and strong bottom lines in Q1 and also in Q2. The cybersecurity sector overwhelmingly beat estimates compared to other sectors within tech and investors should take notice of this strength.

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Beth Kindig

CEO and Lead Tech Analyst for the I/O Fund with cumulative audited results of 141%, beating Ark and other leading active tech funds over four audit periods in 2