Cybersecurity, stocks still attractive but careful to choose well

It is crucial to select well. The stocks of cybersecurity companies have already run up a lot in recent years (the Euronext Cybersecurity World Index has achieved a performance of +44.7% since its debut on 18 August 2023), but with the increasing sophistication of cyber attacks, it is perhaps a good idea to invest in those companies that prioritise investment in research and development. In short, a sector that will certainly grow, but one that should be carefully evaluated in case one wishes to invest not only with funds and ETFs, but also directly with equities.

The IT security landscape has evolved rapidly in recent years. Firstly, the pandemic has accelerated the transition to a cloud world, as people have started working from home instead of the office, thus increasing the perimeter of attacks. Secondly, generative artificial intelligence has brought with it new challenges, such as identity security. 'Valuations in the cybersecurity sector,' explains Alexis Bardou, international equities portfolio manager and analyst at Edmond de Rothschild Am, 'have reached record levels: the top 10 listed vendors are trading on average at more than 50 times their expected non-GAAP (Generally Accepted Accounting Principles) earnings. To get an idea of comparison, consider that the S&P500 index is trading at 22 times. This is an average, but there are some high-quality companies with structural growth that trade at levels more in line with or below the market. Because the industry is very competitive in terms of talent,' Bardou adds, 'companies tend to pay large amounts of share-based compensation, which can artificially increase profitability. If these expenses are taken into account, almost half of the leading listed cybersecurity vendors were not profitable in 2024. Therefore, selectivity is crucial'.

In recent months, market consolidation is taking place in favour of major players such as Palo Alto, Crowdstrike or Zscaler, which offer a wide range of products. 'In our portfolios,' says Christophe Pouchoy, international equity manager at La Financière de l'Echiquier, 'we have holdings in Palo Alto, which is currently acquiring CyberArk, an identity management specialist. This acquisition should add a fourth pillar of growth to the Palo Alto platform, at a time when Ai models will increasingly manage virtual machines/applications, leading to a risk to the security of identity credentials. Zscaler,' continues Pouchoy, 'is also a very interesting company in the networking segment, providing zero-trust protection with its Trust Exchange platform, which features malware protection, data protection, zero-trust connectivity, and business analytics.