Cybersecurity Stocks May Feel the Cuts in Corporate Spending

With the looming prospects of an economic slowdown, companies may be forced to cut spending on cybersecurity, one of the few areas long viewed as one area immune to spending cuts.  However, recent disappointing corporate earnings results from several security-software companies have raised questions about that view.

Concern heightened about spending for cybersecurity software after Tenable Holdings (TENB) cut its revenue forecast last month, followed by similar news at Cloudflare Inc (NET), which sparked large losses in the stocks.  Both companies blamed questions about the economy, which Cloudflare said “resulted in a material lengthening of sales cycles.” Cloudflare also said it expects the headwind will persist all year.

The outlook for cybersecurity spending in the near term looks weaker, despite the sector’s positive long-term growth prospects.  An index of cybersecurity stocks is up less than +3% this year, while a broader index of software stocks is up +15%, and the Nasdaq 100 Stock Index ($IUXX) (QQQ) is up more than +20%.  Mizuho Securities said, “As important as security is, it isn’t immune to the macro, and right now, we don’t know what sustainable growth looks like in a slowing environment or what fair value should be.” 

The weaker sales views from Tenable and Cloudflare suggested a weaker earnings season, where only 67% of software companies have beaten revenue expectations, compared with 75% of technology firms overall.

On the positive side for the cybersecurity sector, stocks in the security group are cheaper than software stocks overall.  The index of cybersecurity stocks trades at 20 times estimated earnings and nearly three times sales compared to the broader software index that trades at 24 times estimated earnings and 5.7 times sales.

Morgan Stanley recommends buying recent weakness in cybersecurity stocks as demand is “bending but not breaking.”  However, ClearBridge Investments said we’re probably entering a tougher period for security spending overall because of economic concerns, and “while it is still a top priority, investors have viewed security as a safe haven, so any weakness at the margins could represent a big concern.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.