Is it time to revisit Cybersecurity and Cloud stocks?
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This week’s insights include: |
- From market darlings to reality check: Despite strong industry fundamentals, many cybersecurity and cloud stocks underperformed as rising interest rates, pandemic demand pull-forward, and sky-high 2021 valuations led to a sharp repricing once growth expectations normalized.
- Cybersecurity: From “nice-to-have” to mission critical: The sector has evolved into an essential, regulation-driven necessity. Spending remains resilient and increasingly favors scaled, platform-based leaders embedded within customers’ security ecosystems.
- Cloud: The backbone of modern business: No longer just a migration story, cloud computing has become core infrastructure. As the market matures, investors are rewarding companies with durable growth and strong economics rather than every business linked to the theme.
- AI reshaping both industries: AI is accelerating cloud infrastructure demand while simultaneously intensifying cybersecurity needs, benefiting established platforms and creating new layers of opportunity across the ecosystem.
- The opportunity: Both sectors remain highly relevant, but the easy gains from simply buying the theme are gone.
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This week's Market Insights article is a 5 minute read! |
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In 2021, cybersecurity and cloud stocks could do no wrong. They had everything investors wanted: huge markets, rapid growth, strong secular tailwinds, and just enough complexity to sound irresistible. Then Covid poured fuel on the fire. Work moved online, data moved to the cloud, cyberattacks surged, and interest rates fell to the floor. That was the perfect setup for a hype cycle. But five years on, many of the market darlings from that era have badly underwhelmed. Some collapsed, others kept growing, but their share prices still went nowhere. That leaves us with the real question: did the industries actually disappoint or did investors simply get ahead of themselves back then? Welcome is part 2 of our three-part “What’s happening with…” series. Today, we're looking at Cybersecurity and Cloud. |
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| "The world has changed. In many cases the cloud is much, much, more secure than the on-premise environment." |
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Here’s a quick summary of what’s been going on: |
- U.S. economic growth slows sharply as Q4 GDP revised lower.
- Markets rally as Iran ceasefire eases oil supply concerns.
- Meta expands AI ambitions with $21B CoreWeave cloud deal.
- Anthropic explores developing proprietary AI chips.
- SpaceX outlines record-breaking IPO plans with strong retail investor interest.
- Nike tumbled after weak outlook despite earnings beat.
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So what caused the fall of cybersecurity and cloud stocks? |
The annualized return of Cybersecurity ETFs over the last five years according to ETF Database ranged from 0.5% to 8.9%, while Cloud Computing ETFs returned between -10.9% to 8% p.a. In contrast, the S&P 500 returned an annualized 11.7% over the same time period. So what caused this underperformance? After looking through the data, the short answer is: the story stayed good but the price paid for these stocks was too high. |
- The first problem was macro. In 2020 and 2021, low interest rates made long-duration growth assets incredibly attractive. Investors were happy to pay them for profits that might only show up years down the track. Once inflation surged and central banks started hiking rates, that was no longer as attractive - money was no longer cheap, so future earnings became less valuable and richly valued growth stocks tend to feel that first.
- The second problem was valuation. By 2021, a lot of cloud and cybersecurity stocks were priced for perfection. Not for success… perfection. That meant no room for slower than expected growth, tougher competition, longer sales cycles, or even the slightest stumble. Once the market stopped handing out heroic multiples, the repricing was brutal.
- The third problem was that pandemic demand pulled a lot of spending forward. Businesses rushed into digital transformation, cloud migration, collaboration software, and cyber protection all at once. That made growth look spectacular for a period but it also set up much harder comparisons later. Once the emergency phase faded, so did some of the urgency in spending.
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💡The biggest losers were usually the companies caught in one of two traps. Either they were genuinely weak businesses that had been swept up in the hype or they were decent businesses whose valuations had drifted so far into fantasy that even good execution was not enough. That is an important distinction. Some of these stocks fell because the business model cracked. Others fell simply because investors had paid 30 times tomorrow’s hopes. With that said, are these two industries still worth being in your watchlist? Is it a good time to get into them as an investor? Learn more by reading the full article. |
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Join the discussion by leaving a comment! |
Which cybersecurity and/or cloud stocks are you watching right now? |
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Thursday China GDP Growth Rate (YoY) Forecast: 4.6%, Previous: 4.5% Why it matters: GDP growth matters now because markets are watching whether Beijing can keep growth resilient enough to avoid more stimulus as global uncertainty rises. UK GDP (MoM) Forecast: 0.1%, Previous: 0%
Why it matters: With inflation risks still elevated globally, any sign of weak or resilient growth could quickly shift expectations for the Bank of England and the GBP. |
Saturday Japan Inflation Rate (YoY) Why it matters: Higher oil costs, a weak yen, and debate over further BOJ rate hikes have made every inflation print more important for markets. |
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