Cybersecurity Players Should Do Well Despite Economic Headwinds

OKTA: Okta logo
OKTA
Okta

Our theme of Cyber Security Stocks has seen a sizable sell-off over the last month, declining by about 24%, compared to the Nasdaq-100 which remains down by about 12% over the same period. With the sell-off, the theme remains down by around 28% year-to-date, compared to the Nasdaq-100, which remains down by about 26% over the same period. While these stocks held up pretty well earlier this year, stubbornly high inflation and the recent interest rate hikes by the U.S. Federal Reserve have resulted in a big sell-off in the sector, which is largely comprised of high-growth, high-multiple stocks. However, there’s probably a good reason for investing in these stocks following the recent big drawdowns.
While there have been concerns that the U.S. could be headed for a recession, with Q1 GDP already shrinking year-over-year, we think cybersecurity-related spending will remain a priority for businesses and the government for a couple of reasons. Governments, critical infrastructure, and businesses in the U.S. and Europe remain key targets of state-sponsored cyber-attacks, as Russia potentially looks to retaliate against sanctions imposed by Western powers following the Russian invasion of Ukraine. We believe that ramping up cybersecurity will be a priority for businesses as attacks in the digital space have the potential to cause massive economic damage. Moreover, the broader trend of hybrid and remote 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 even post the pandemic. Cybersecurity spending largely held up over 2020 when companies scaled back IT budgets and it is likely that a similar trend could hold up in the event of an economic downturn as well.
Within our theme, Okta stock (NASDAQ:OKTA) has been the worst performer declining by almost 60% year-to-date. On the other side, Palo Alto Networks stock (NASDAQ:PANW) has been one of the better performers, with its stock down by just about 13% year-to-date.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 OKTA Return -25% -60% 249%
 S&P 500 Return -3% -16% 79%
 Trefis Multi-Strategy Portfolio -6% -22% 211%

[1] Month-to-date and year-to-date as of 5/17/2022
[2] Cumulative total returns since the end of 2016

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