Cybersecurity stocks are so hot investors question their staying power

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeCybersecurityInvestorCybersecurity stocks are so hot investors question their staying powerRecent warnings from the AI industry about threats posed by the technology have given investors reason to buy cybersecurity stocksAuthor of the article:The rally is in stark contrast to the beginning of the year, when AI disruption fears sparked an indiscriminate selloff across the software industry. Photo by Michael Nagle/Bloomberg via Getty ImagesShares of cybersecurity companies have soared in recent months on bets that the threats posed by cutting-edge artificial intelligence models will be a boon for their businesses. But some of the stocks have run up so much that investors are questioning whether they have gone too far.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountA basket of cybersecurity stocks tracked by Goldman Sachs has more than doubled since hitting a low on April 10 after Anthropic restricted the release of its Mythos AI model over concerns it could power cyberattacks. Crowdstrike Holdings Inc., Palo Alto Networks Inc. and Fortinet Inc. have all gained more than 130 per cent since then, putting them among the 10 best performers in the S&P 500 over that span.The Goldman basket, which closed at a record high on Wednesday, fell more than one per cent on Thursday amid a widespread selloff across the tech sector.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againThe rapid gains have made security stocks some of the most expensive in the market. CrowdStrike is priced at more than 170 times estimated earnings, which is second only to Tesla Inc. in the S&P 500, according to data compiled by Bloomberg. Palo Alto Networks is the fifth-most expensive in the index at 91 times profit projected over the next 12 months. Fortinet’s multiple of 48 ranks 16th.“If you’re looking to get in now, you have to recognize that what you’re paying reflects the expectation that everything will be perfect in the future,” said Brad Long, chief investment officer at Wealthspire, which has about US$593 billion in assets. “The tailwinds for cybersecurity are obvious, but if we see any weakness — if the AI capex cycle slows, or even if we stop seeing so many sophisticated AI attacks — then their revenue could slow and the stocks could sell off materially.”The rally is in stark contrast to the beginning of the year, when AI disruption fears sparked an indiscriminate selloff across the software industry. While those worries have subsided for many software companies amid strong financial performance in the sector, a series of recent warnings from within the AI industry about grave threats posed by the technology have provided investors with another reason to buy cybersecurity stocks.The Goldman cybersecurity basket has jumped 18 per cent since Sept. 11, the last trading day before Anthropic chief executive Dario Amodei called for slowing development of the most advanced models.With the need for stronger cybersecurity defences now widely accepted, the question is whether the companies can deliver revenue and profit growth to satisfy expectations implied by their nose-bleed valuations.“Cybersecurity may have gotten over its skis,” Bernstein analyst Peter Weed recently cautioned while cutting his ratings on Palo Alto, Okta Inc. and SentinelOne Inc.While the group is seeing real demand, “implicit in the sector stock prices seem to be a degree of acceleration that could rival consumption software like hyperscaler compute or databases,” he wrote in a Sept. 17 note. But cybersecurity growth is likely to be constrained by practical factors like customers’ employee headcount, Weed said.Still, fundamentals appear to be heading in the right direction. In late August, a better-than-expected revenue forecast from CrowdStrike sent the stock up more than 20 per cent the day after earnings, the most since 2019.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.“The Mythos moment translated into mass-market acceptance that AI adoption needs security,” chief executive George Kurtz said in a statement in the earnings report. “Every enterprise will run on AI, and securing it is the largest market opportunity in our history.”There have been a number of AI-assisted hacks this year, as well as breaches by AI agents that have alarmed cybersecurity experts and AI developers.On Thursday, Australian Prime Minister Anthony Albanese said an OpenAI model had hacked a government website earlier this year, gaining unauthorized access to files on a site for reporting healthcare statistics.In July, OpenAI said its AI models inadvertently hacked Hugging Face Inc. Last week, Google revealed its Gemini AI model made similar incursions into three company systems during security testing.“We believe the market is increasingly pricing in a step-function increase in cyber risk, supporting both higher security spending and a more constructive valuation framework across the sector,” Bank of America analyst Tal Liani wrote in a Sept. 18 note. He called cybersecurity “a mega-theme and enabler of the AI era” while raising his price targets on CrowdStrike, Okta, and SailPoint Inc.Despite the run-up in cybersecurity stock prices, valuation signals can be deceiving if growth outpaces expectations, according to Josh Taves, managing director at Post Oak Group.“I understand if people are approaching security with a little more trepidation given how much it has risen this year, but while I expect budgets for other kinds of software will decrease as AI models take over, security spending should hold strong or even increase,” he said. “Traditional valuation metrics don’t hold as much water in an environment like this. Investors will pay more because the demand backdrop is so strong.”—With assistance from Subrat Patnaik, Neil Campling and David Watkins.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.