The Value Rotation Has Done Little To Dim Enthusiasm For Cybersecurity Stocks

Aug. 18, 2022 11:07 PM ETPING, TUFN, WCBR
WisdomTree profile picture
WisdomTree
4.72K Followers

Summary

  • Even in a more challenging economic environment, it is difficult to imagine companies deciding to cancel their cybersecurity subscriptions.
  • U.S. ETF investors put more than $900 million toward cybersecurity-specific strategies during the first six months of 2022.
  • As we look at cybersecurity, we believe it is important to be on the cutting edge, focused on the quintessential cat-and-mouse game occurring every minute of every day across the internet.

Data or network protection, business people press shield icon, virus security. Data protection and insurance Business security concepts, information security against virus. binary number 1010.

Yudram_TA/iStock via Getty Images

By Christopher Gannatti, CFA

The global equity market shifted around November 2021, and we believe we’ll look back at that turning point for some time. Before that date, going back nearly to the Great Recession of 2008–09, the cost of capital was of little concern. After that date, with central banks signaling and then executing a policy change to fight inflation, the cost of capital became almost the full story.

In effect, the market slammed on the brakes for many of the more innovative companies that represent novel ideas but possibly a multiyear journey to hit positive cash flows and ultimately profitability. The further the perceived distance to profitability, the worse the return in 2022, at least so far.

Thematic Strategies—A Rush to the Exits?

With returns so challenged, it stands to reason that investors couldn’t exit thematic equity positions fast enough. In most cases, these are the opposite of the dividend-paying, value-oriented companies that have done well in the first half of 2022.

WisdomTree has classified the universe of thematic, U.S.-listed exchange-traded funds (ETFs) to track different measures. Looking at Figure 1, we can see the flows picture for the second quarter and first half of 2022.1

  • With everything happening in the China/U.S. relationship, it is amazing that the top asset-gathering theme in WisdomTree’s classification was focused on Chinese companies.
  • It’s interesting to see that semiconductors took in so much money during the first quarter that, even with outflows of more than $600 million during Q2 2022, they were still No. 2 in WisdomTree’s thematic classification for the six-month period.
  • For the balance of this piece, we’d like to call attention to cybersecurity. Many cybersecurity companies offer their software through the cloud and could therefore also show up in cloud computing strategies, depending on the parameters of the given strategy. Cloud computing has seen a challenging performance environment, with outflows of more than $600 million during the first six months of 2022. Cybersecurity has seen a difficult performance environment, and the theme has seen inflows of more than $900 million in the same period.

Figure 1: Following the Money in U.S. Thematic ETFs

Figure 1: Following the Money in U.S. Thematic ETFs

Russia/Ukraine as a Catalyst?

There is a history of cyberattacks emanating from Eastern Europe and Russia, the NotPetya attack being one of the most widely known and globally impactful.2 Russia’s action in Ukraine inspired heightened vigilance around cybersecurity. Even though offensive cyber efforts out of Russia so far in the conflict have focused mainly on Ukraine, Western nations and cybersecurity companies based in Western nations recommend respecting the possible threat and preparing accordingly.

Even in a more challenging economic environment, it is difficult to imagine companies deciding to cancel their cybersecurity subscriptions. Many also need a combination of services as employees undertake remote-first or hybrid setups, thinking about endpoint protection, cloud security, single sign-on and zero-trust network architectures, to name a few. If technology spending needs to be cut, we believe it will likely be in other areas—not cybersecurity.

An ACTIVE Acquisition Environment So Far in 2022

We saw that U.S. ETF investors put more than $900 million toward cybersecurity-specific strategies during the first six months of 2022. Large institutional investors are also putting money to work in cybersecurity companies—in certain cases buying entire firms, even as M&A and public offerings have slowed in 2022 compared with 2021.

  • Ping Identity Holding (PING) will be taken private by Thoma Bravo for $2.8 billion. Compared with the closing price on the prior day, this deal represents a premium of about 63%. Ping Identity provides identity verification solutions. The deal could benefit Thoma Bravo, allowing it to tap into enterprise security solutions, and Ping Identity, allowing it to accelerate its cloud transition.3
  • Tufin (TUFN) entered a definitive agreement to be purchased by Turn/River Capital for $570 million. This represents a 44% premium to Tufin’s closing value the day before the announcement. The deal could accelerate Tufin’s ability to help enterprise customers use policy-driven automation to improve cybersecurity solutions.4
  • Datto, a market-leading global provider of security and cloud-based software solutions, has completed a sale to Kaseya in a deal valued at $6.2 billion. Vista Equity Partners, the majority holder of Datto, was involved in the deal. Vista acquired Datto in 2017. Since then, Datto has doubled its annual revenue to $620 million.5

It is not a time when investors looking at cybersecurity companies see strong share price performance, but they do see a lot of activity in the space.

Conclusion—Cybersecurity as an Investment in 2H 2022?

As we look at cybersecurity, we believe it is important to be on the cutting edge, focused on the quintessential cat-and-mouse game occurring every minute of every day across the internet. In many cases, newer companies offer disruptive solutions that could make the difference in protecting data from nefarious actors. The WisdomTree Cybersecurity Fund (WCBR) takes a definitive approach, focusing on innovative cybersecurity companies with strategies looking to the future.

1 Sources: WisdomTree, Morningstar, Bloomberg. All data as of 6/30/22. Data based on WisdomTree’s internal classification of thematic funds. Historical performance is not an indication of future performance, and any investments may go down in value.

2 Source: “Russian military ‘almost certainly’ responsible for destructive 2017 cyber attack,” National Cyber Security Centre, 2/14/18.

3 Source: Escobar, Sabrina, “Ping Identity Soars as Thoma Bravo Buying Software Company for $2.8 Billion,” Barron’s, 8/3/22.

4 Source: “Tufin Enters Into Definitive Agreement to be Acquired by Turn/River Capital in a $570 million Transaction,” BusinessWire, 4/6/22.

5 Source: “Datto Completes Sale to Kaseya,” BusinessWire, 6/23/22.

Important Risks Related to this Article

Christopher Gannatti is an employee of WisdomTree UK Limited, a European subsidiary of WisdomTree Asset Management, Inc.’s parent company, WisdomTree Investments, Inc.

There are risks associated with investing, including possible loss of principal. The Fund invests in cybersecurity companies, which generate a meaningful part of their revenue from security protocols that prevent intrusion and attacks to systems, networks, applications, computers, and mobile devices. Cybersecurity companies are particularly vulnerable to rapid changes in technology, rapid obsolescence of products and services, the loss of patent, copyright and trademark protections, government regulation and competition, both domestically and internationally. Cybersecurity company stocks, especially those which are internet related, have experienced extreme price and volume fluctuations in the past that have often been unrelated to their operating performance. These companies may also be smaller and less experienced companies, with limited product or service lines, markets or financial resources and fewer experienced management or marketing personnel. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. The composition of the Index is heavily dependent on quantitative and qualitative information and data from one or more third parties, and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

gannatti

Christopher Gannatti, CFA, Global Head of Research

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

WisdomTree profile picture
4.72K Followers
WisdomTree launched its first ETFs in June of 2006, and is currently the industry's fifth largest ETF provider. The WisdomTree Seeking Alpha profile will feature content by some of our leading analysts including: Luciano Siracusano: Luciano Siracusano is WisdomTree's Chief Investment Strategist and Head of Sales. He is the co-creator with CEO Jonathan Steinberg of WisdomTree's patented Indexing methodology and has led the firm's sales force since 2008. Luciano is a regular guest on CNBC and FOX Business, and speaks frequently on ETFs, indexing and global financial markets. A former equity analyst at ValueLine, Luciano began his career as a speechwriter for former New York Governor Mario Cuomo and HUD Secretary Henry Cisneros. He graduated from Columbia University with a B.A. in Political Science in 1987. Jeremy Schwartz: As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel's head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.” Christopher Gannatti: Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. Rick Harper: Rick Harper serves as the Head of Fixed Income and Currency for WisdomTree Asset Management, where he oversees fixed income and currency products developed through our collaborations with the BNY Mellon Corporation and Western Asset Management. Rick has over 19 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. Bradley Krom: Bradley Krom joined WisdomTree as a member of the Fixed Income and Currency team in December 2010. He is involved in creating and communicating WisdomTree’s thoughts on currency and fixed income markets, as well as analyzing existing and new fund strategies. Prior to joining WisdomTree, Bradley served as a senior trader on a proprietary trading desk at TransMarket Group. Tripp Zimmerman, Research Analyst Tripp Zimmerman began at WisdomTree as a Research Analyst in February 2013. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Prior to joining WisdomTree, Tripp worked for TD Ameritrade as a fixed income specialist. Tripp also worked for Wells Fargo Advisors, TIAA-CREF and Evergreen Investments in various investment related roles. Tripp graduated from The University of North Carolina at Chapel Hill with a dual degree in Economics and Philosophy. Tripp is a holder of the Chartered Financial Analyst designation. Jonathan Steinberg, CEO Prior to establishing WisdomTree, Jonathan founded, and served as Chairman and CEO of Individual Investor Group, Inc. From 1998 to 2004, he held the role of Editor-in-Chief of Individual Investor and Ticker magazines. Before his entrepreneurial accomplishments, Jonathan was an Analyst in the Mergers & Acquisitions division at Bear Stearns & Co. He attended The Wharton School at the University of Pennsylvania and is the author of Midas Investing, published by Random House in 1996. Zach Hascoe, Capital Markets Zach Hascoe began at WisdomTree in August 2010, and works directly with David Abner, Head of Capital Markets. The Capital Markets group is involved in all aspects of the WisdomTree ETFs including product development, helping to seed and bring new products to market, as well as trading strategies and best execution strategies for the client base. Zach works closely with the trading and liquidity community and does analytics on ETF baskets and the capital markets. He is a frequent contributor to the WisdomTree blog on topics related to the capital markets, liquidity, structure and best execution. In addition, he manages the hedge fund relationships for the firm. Zach received a B.A. from Bucknell University and was Captain of the Bucknell Tennis Team.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.