CrowdStrike IPO on the Nasdaq Stock Exchange on June 12, 2019.
Economic concerns were a major theme in the tech industry during the second-quarter earnings season, with companies warning of slowing spending on advertising, gadgets, e-commerce and software.
But with interest rates rising and inflation stuck near a 40-year high, one part of the tech sector still shows a booming demand: cybersecurity.
Earnings reports from CrowdStrike and SentinelOne this week pleasantly surprised Wall Street, and the two companies, which specialize in protecting the many devices connected to corporate networks, raised their forecasts for the year.
“Cybersecurity is not a discretionary item,” CrowdStrike CEO George Kurtz said during his company’s earnings call.
Investors heard similar comments last week from Palo Alto Networks, which reported earnings for the first time in a decade. The data center security company’s stock soared 12%, its best performance since its IPO in 2012.
And two weeks ago, Cisco said its security business grew faster than any other segment, beating analyst estimates by about $100 million. Security is now Cisco’s top investment area, CEO Chuck Robbins told analysts on a conference call.
Across the security landscape, vendors are busy providing tools to large enterprises concerned about vulnerabilities that have arisen due to remote working and the hybrid phenomenon and an increase in cyberattacks launched as Russia is at war with Ukraine.
“In transformation projects, the vast majority of our customers are continuing to invest here, despite the expected near-term macroeconomic impacts,” said Nikesh Arora, CEO of Palo Alto Networks, on the call with analysts. “Security spending is driven by our customers’ desire to move to the cloud, build more direct relationships with their customers, modernize their IT infrastructure, and gain efficiencies while adapting to a new way of working. These efforts continue.”
Investors haven’t made any money on the security bet this year, but they’ve lost less than if they had bet on the broader tech market.
The cyber-focused exchange-traded funds of First Trust Nasdaq and Global X (ticker BUG) are down 22% and 19%, respectively, in 2022. The Nasdaq is down 25% for the year.
Cyber stocks against Nasdaq
Within software, security vendors are showing the edge they have in turbulent economic times. Customers can’t cut costs given the myriad of threats they face and the risk to their business if they are hit by a big ransomware attack. So they look elsewhere.
Last week, cloud software maker Salesforce cut its forecast for the fiscal year and said customers had become more deliberate about purchases. The stock slid 11% over the next three trading sessions. Zoom shares also fell after the video-calling software company cut its full-year projections.
Elsewhere in tech, ad-supported companies like Snap and Facebook have been bludgeoned, while e-commerce companies Shopify and Affirm have warned of a return to pre-Covid spending habits. Even Apple CEO Tim Cook said the iPhone marker was seeing “pockets of sweetness” as fears of an economic downturn percolated.
“I don’t know if anyone uses the word recession,” said Gary Steele, CEO of Splunk, whose software helps companies analyze data to monitor performance and detect threats, in an interview this week. “I just think we saw macro conditions where budgets seemed to be tightening, which meant they had to make a decision about when they wanted something to happen.”
second quarter revenue at CrowdStrike grew 58% year-over-year as the company added more than 1,700 subscribing customers, more than in any previous quarter. Burt Podbere, chief financial officer of CrowdStrike, said the company was benefiting from “strong tailwinds in the industry”.
Kurtz told analysts that some transactions take longer because customers are forced to obtain higher levels of required approvals before making purchases. But they still happen. Jefferies was one of several banks to raise its price target on CrowdStrike, and analysts at the company said the company should be reasonably protected in a downturn.
SentinelOne CEO Tomer Weingarten touted his company’s record gross margin and customer retention rate.
“Cybersecurity remains a top priority for enterprise IT spending, a must buy for all businesses,” he said.
Palo Alto’s Arora said customers signed long-term agreements during the quarter. This lines up with comments from analysts at the Guggenheim, who wrote in a note to clients that the security spending of the companies they cover hasn’t fallen as much as IT spending.
Not every space company sees a pop.
Okta shares fell 33% on Thursday after the secure login software provider cited a “weakening economy” and said it was struggling to onboard Auth0 vendors, which it acquired last year for $6.5 billion.
“Integrations are always difficult and affect every part of an organization,” CEO Todd McKinnon said on the earnings call. “As we move forward, we’ve seen increased attrition within the go-to-market organization, as well as some confusion in the field, both of which have impacted our business momentum.”
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