A nasty week for cyber security stocks as earnings focus fades
The past week has been brutal for cyber security stocks, one of our most popular equity theme baskets, down 11% despite Q3 earnings hitting estimates and maybe a slight hint of growth slowing. Our cyber security basket is down 38% from the peak compared to only 22.5% for the MSCI World as higher equity valuations have made cyber security stocks more vulnerable to higher interest rates, but since 2015 the returns on cyber security stocks have still been much better and we expect the long-term return over 10 years to exceed that of the overall equity market based on high demand for cyber security services and products amid the ongoing war in Ukraine and rising geopolitical tensions.
If we look at our basket we can see that among the big players it was Fortinet that saw the biggest hit down 20% over the past week. The company’s Q3 revenue and EPS were both above estimates while fiscal year billings, the forward looking indicator on sales, were revised down a bit, but even worse the company said that it will stop providing this metric in the future. These decisions are often viewed badly by investors as it indicates that the company’s growth is slowing down. Among the minor players in the industry, Varonis Systems shares were down 37% over the past week as the Q4 outlook on revenue at $139-142mn missed estimates of $156mn. So while industry growth is still high at 26% compared to a year ago market expectations are clearly too high at this point acting as headwinds on price performance.