Cybersecurity stocks are beating the market in a volatile economy

Economic concerns were a key theme in the tech industry during the second-quarter earnings season, as companies warned of slower spending on ads, utilities, e-commerce and software.

But with rising interest rates and Inflation stuck near 40-year highOne part of the technology sector is still seeing explosive demand: cybersecurity.

This week’s earnings report from CrowdStrike and SentinelOne Wall Street pleasantly surprised, and both companies that specialize in securing multiple devices tied to corporate networks boosted their forecasts for the year.

“Cybersecurity is not an arbitrary line item,” CrowdStrike CEO George Kurtz said on his company’s earnings call.

Investors heard similar comments last week from Palo Alto Networks, the company reported profit for the first time in a decade. Shares of the data center security company jumped 12%, its best performance since its IPO in 2012.

And two weeks ago, Cisco said its security business grow up faster than all other segments, beating analysts’ estimates by around $100 million. CEO Chuck Robbins told analysts during a conference call that security is currently a top investment area for Cisco, and the company is increasing staffing as it raises prices to counter the higher costs of its services. components they need to assemble the hardware.

In the security landscape, vendors are busy delivering tools to large companies concerned about vulnerabilities that have emerged due to hybrid and remote working and the rise in attacks. It happened while Russia was in the war in Ukraine.

Nikesh Arora, CEO of Palo Alto Networks, said on a call with analysts: “In transformational projects, the vast majority of our customers continue to invest here, despite their investment. expected short-term macroeconomic effects”. “Security spending is tied to customers’ desire to move to the cloud, foster more direct relationships with customers, modernize their IT infrastructure, and drive efficiency while adapt to the new way of working. Those efforts continue.”

Investors haven’t made money on stock bets this year, but they’ve lost less if they bet on the broader tech market.

Network-focused exchange-traded funds from First Trust Nasdaq and Global X (code symbol BUG) are down 22% and 19% respectively in 2022. Nasdaq is down 25% for the year.

In software, security vendors are demonstrating the advantage they enjoy in uncertain economic times. Customers cannot reduce their spending given the myriad of threats they face and the risk to their business if they are hit by a major ransomware attack. So they are looking elsewhere.

Last week, cloud software maker Sales force cut its guidance for its fiscal year and said customers have become more intentional about purchases. The stock fell 11% in the next three trading sessions. Shares of Launch also collapsed after video calling software company reduce its forecast for the whole year.

Elsewhere in the tech sector, ad-supported businesses like Snap and Facebook received pummeledwhile online trading companies Shopify and Confirm warning about the return Pre-Covid spending patterns. Even Apple CEO Tim Cook said the iPhone marker look “pocket of soft” as fears of a recession are rampant.

Gary Steele, CEO of Splunk, their software helps companies analyze data to monitor performance and detect threats, in an interview this week. “I just think we’ve seen macro conditions where budgets seem to be tightening, which means they have to make decisions about when they want something to happen.”

Second quarter turnover at CrowdStrike grew 58% from a year earlier when the company had more than 1,700 registered customers, more than in any previous quarter. Burt Podbere, CrowdStrike’s chief financial officer, said the company is enjoying “strong industry favorable conditions.”

Kurtz told analysts that it will take longer to process some transactions because customers are being forced to obtain a higher level of approval before making a purchase. But they are still happening. Jefferies is among a number of banks raising its price targets on CrowdStrike, and analysts at the company say the company should be reasonably sheltered in the event of a downturn.

SentinelOne CEO Tomer Weingarten touted his company’s record-high gross margins and customer retention rates.

“Cybersecurity remains a top priority for enterprise IT spending, a must-buy for all businesses,” he said.

Palo Alto’s Arora said customers signed up for long-term deals during the quarter. That aligns with comment from Guggenheim analysts, who wrote in a note to clients that security spending among the companies they cover isn’t censoring as much as IT spending.

Not all companies in this sector see a pop-up.

Okta shares fell 33% on Thursday, after the secure login software provider cited a “weak economy” and said it was having trouble integrating salespeople from Auth0, which it bought back last year for $6.5 billion.

“Integrating is always difficult and affects every part of the organization,” said CEO Todd McKinnon. “While we are making progress, we have experienced increasing attrition in the market marketing organization, as well as some confusion in this area, both of which have affected the dynamics of the market. our business force.”

CLOCK: Cohesity CEO Sanjay Poonen said: Security and data are strong trends in small cloud companies