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There’s no denying 2023 has been an excellent year in which to be invested in technology stocks. Up 53% year-to-date, the tech-heavy Nasdaq-100 Index (NDX) tells the tale of that tape.
As advisors by now know, much of that upside is attributable to the “magnificent seven” stocks and other names with footprints in the artificial intelligence (AI) space. In fact, it almost feels as though AI enthusiasm has been so fervent that previously beloved tech segments, such as cloud computing and cybersecurity, went ignored in 2023.
That shouldn’t be the case because the major exchange traded funds dedicated to cloud and cybersecurity stocks delivered impressive returns in 2023. For the purposes of this article, cybersecurity will be the focus because as has been the case in years past, 2023 was eventful regarding cyber bandits targeting corporations, governments and individuals.
That’s one way of saying that while cybersecurity investing is thematic investing, the theme itself is arguably evergreen and will remain prominent in 2024.
Cybersecurity Matters More and More
There are some certainties regarding cybersecurity and they are pertinent to the underlying investment thesis. First, as the world becomes more digitally interconnected, the need for cybersecurity increases. Second, the financial services industry, including advisory/wealth management, is an epicenter of cybersecurity need and demand.
As such, it’s rare that cybersecurity equities can be considered inexpensive in the strictest sense of the word, but valuation alone isn’t a reason for glossing over this opportunity. It’s actually a bad reason for committing that error.
“Since its launch in July 2015, the First Trust Nasdaq Cybersecurity ETF (CIBR) has traded at a 30% average premium versus the S&P 500® Information Technology Index, based on forward price-to-earnings (P/E),” notes First Trust. “However, as certain technology heavyweights, such as Microsoft, Apple, and NVIDIA Corporation—which together comprise over 60% of the sector—surged this year, the index’s forward P/E increased from 20.2 to 26.6.2 During the same stretch, CIBR’s forward P/E decreased slightly, from 24.0 to 23.3,and currently represents an 11% discount to the index.”
What potentially makes cybersecurity attractive from an investment perspective is that cybersecurity intersects with other high-octane themes. Think AI, cloud computing, online shopping, physical infrastructure and more. That doesn’t make cybersecurity completely impervious to recessions, but it does imply economic downturns might weigh less on cybersecurity than on other corners of the tech sector.
Actually, There’s Value to Be Had
As noted above, cybersecurity stocks aren’t value fare and with the Nasdaq CTA Cybersecurity Index up almost 39% this year, it’s arguably difficult to convince clients that there’s value in cybersecurity.
However, there is because the current discounts seen on the Nasdaq CTA Cybersecurity Index are historically rare, indicating advisors don’t have to pay up to access this compelling investment thesis.
“In our opinion, there are many reasons to be bullish on the long-term prospects for the cybersecurity investment theme, as well as recent developments which may support its near-term growth,” concludes First Trust. “For example, increased regulations regarding the disclosure of cyberattacks, heightened geopolitical stressors, and the need to maintain customers’ trust amid increasingly sophisticated cyberthreats, to name a few. But one of most compelling aspects of the cybersecurity theme today, in our view, is that relative valuations have rarely been this attractive.”
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