Cybersecurity Stocks Have Soared on AI Fears. The Price Tag Is Catching Up
Fear sells, and right now it's the hottest product in software. Cybersecurity stocks have ripped higher as AI-powered threats fuel a new wave of corporate security spending. The rally has been so fierce that even some of the market's loudest bulls are flinching at the price tag.
Fear premium: Goldman Sachs’ basket of cybersecurity stocks has more than doubled since its April 10 low, with fears of AI-powered cyberattacks fueling investor appetite. Those concerns are mounting. Australia's prime minister said an OpenAI model hacked a government website, while Google disclosed that Gemini breached three company systems during testing. Private capital is following suit, with Cyera securing another $400M from Goldman's venture arm.
- CrowdStrike, Palo Alto Networks, and Fortinet have each surged more than 130% from their April lows.
- Okta leads year-to-date returns with a 120.2% gain, followed by Fortinet at 116% and CrowdStrike at 107.3%, as investors pile into the sector.
The Valuation Bill Comes Due
The rally has turned cybersecurity into some of the most expensive real estate in the S&P 500. CrowdStrike trades at more than 170 times estimated earnings, second only to Tesla. So far, the business is giving investors plenty to work with. Second-quarter revenue climbed 26% to $1.47B, while record net new ARR reached $333M. CEO George Kurtz called securing AI "the largest market opportunity in our history," though expectations are climbing just as quickly as the numbers.
- Bernstein's Peter Weed downgraded Palo Alto, Okta, and SentinelOne, warning that cybersecurity stocks "may have gotten over their skis" after the rally.
- Société Générale's cybersecurity basket trades at ~25 times forward earnings, still below its 30.2 average since 2018 despite the sector's sharp gains.
The other side: SocGen's Manish Kabra points to annual EPS growth of roughly 16% since 2020, up from 10% the prior decade. The sector's low correlation with semiconductors also gives investors a way to diversify beyond the crowded AI trade. Wealthspire CIO Brad Long is more cautious, warning that slower AI spending or fewer sophisticated attacks could see revenue weaken and stocks "sell off materially." For investors chasing the rally, even a slight slowdown could make those lofty valuations hard to defend.
