What looks like the largest hack in history should have boosted cybersecurity stocks on Friday, but an unstoppable stock market selloff had other plans.
Cybersecurity stocks were not immune to a rout across the tech sector on Friday. CrowdStrike stock fell 5.6%, with Palo Alto Networks stock down 5%. Zscaler stock tumbled 5.5% while Cloudflare stock plunged 10.8%. The First Trust NASDAQ Cybersecurity exchange-traded fund (CIBR) was 4.8% lower.
Many other stocks are worse off in a dramatic selloff across the tech space, led by a staggering 30% crash in Intel shares. Catalyzing investor fears were earnings from Intel and Amazon as both companies flagged shrinking cash flows -- the blame falling on AI spending, the same trend that has weighed on tech stocks for more than a month.
That the selloff has hit cybersecurity stocks might come as a surprise.
While the stock market is a sea of red, in the cryptocurrency world there's another drama altogether: crypto exchange Binance, the world's largest, reported a hack of $6.3 billion. While the exchange and its partners said they've successfully clawed back a good portion of the losses, what appears to be the biggest hack ever in dollar terms is still a moment for pause.
It's moments like these that usually see cybersecurity stocks shine, as they did last week when it was revealed that the widely used PHP coding language had flaws that might boost demand for security spending.
It doesn't necessarily have to be true that companies affected by hacks will need specific cybersecurity tools. When it comes to the crypto world, the architecture of many centralized platforms -- including their massive honey pot of digital assets -- makes these companies targets in a way that your average Fortune 500 just isn't.
Rather, major hacks tend to reignite generalized bets on cybersecurity demand trends, including the potential that AI tools will make digital security more difficult, which has benefited many cyber stocks. The CIBR ETF has gained around a third over the last year.
But stocks that can benefit from hype are also vulnerable to the same trend in reverse. While investor fears over cybersecurity on the back of the Binance hack could have helped cybersecurity stocks, investor fears over tech stocks more broadly are a much more powerful force.
The Binance hack just wasn't enough to buck the wider trend in the stock market on Friday, which had seen a sea of red across the tech space.
It doesn't help that cybersecurity stocks themselves can be fickle investments, in no small part because these names often trade at extreme valuations. Take Palo Alto Networks stock, which has a price that trades at 700 times the company's 12-month trailing earnings. Nvidia, that AI stock darling, has a trailing-12-months price-to-earnings ratio of around 25 times, by comparison.
That doesn't mean cybersecurity stocks aren't a buy.
Many on Wall Street remain bullish on the sector, in no small part because of its exposure to rising threats from AI. CrowdStrike, Palo Alto Networks, Zscaler, and Cloudflare all command overwhelming Buy ratings among analysts surveyed by FactSet -- even if the stock declines on Friday don't make it seem that way.
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