Wall Street is placing bets on which software companies artificial intelligence will crown, and which it will kill. But one corner of the market has already cemented its unique position as the beneficiary of both the promise and the paranoia of the AI boom — cybersecurity stocks.
Palo Alto Networks, Crowdstrike, and Fortinet have all more than doubled year-to-date and are currently among the top 20 S&P 500 performers this year. In fact, no other category across the entire market has more representation at the top of the index than “Cybersecurity and Observability.”
The same fear of AI disruption that is battering traditional software stocks, is pouring billions into cyber defense. As the number of hacking attempts grows by the day, and even the leaders of the world’s biggest AI companies themselves are sounding the alarm, digital protection now demands non-negotiable funding.
“Cybersecurity has moved from being a behind the scenes utility to being on the frontier,” said Dec Mullarkey, a managing director of investment strategy and asset allocation at SLC Management. “Now everyone needs it, and its progress and demand is running in parallel with breakthroughs in LLM models.”
The recent rally has allowed cyber stocks to recover from the winter sell-off dubbed “SaaSpocalypse.” In one day this February, the introduction of Anthropic’s new workflow-automating AI agents wiped out $285 billion across the software, financial services and asset management sectors.
At that point, the market believed that artificial intelligence would disrupt all software-as-a-service companies.
The sentiment began to shift in April with the release of Anthropic’s Mythos model capable of finding software security holes, followed by the launch of Project Glasswing to fix them.
“What happened was AI revealed the weaknesses in software, driving businesses to boost spending on protecting their online data,” said Kim Forrest, chief investment officer at Bokeh Capital Partners.
But the real turning point came in the summer. First, cybersecurity companies reported strong quarterly earnings in June. Then, the OpenAI model hacked Hugging Face — and there’s been no looking back for the cyber stocks ever since.
While traditional software segments within the iShares Expanded Tech-Software Sector ETF (IGV), a primary proxy for the industry, have posted negative or flat returns this year, the cybersecurity sector has more than doubled.
In September, three companies — CrowdStrike (CRWD; closed at $259.35 on September 28, ▲129% YTD), Fortinet (FTNT; $176.33, ▲126%), and Okta (OKTA; $202.18, ▲42%) — hit their new all-time highs, and Palo Alto Networks (PANW; $392.09, ▲119%) became the first cybersecurity firm to enter the S&P 100.
“Joining the index of corporate America’s top hundred enterprises formalizes an institutional paradigm shift,” said Almas Almaganbetov, equity analyst at Freedom Broker. “Cybersecurity is now a blue-chip systemic asset.”
For Gerry Sparrow, president of Sparrow Capital Management in St. Louis, keeping money in Palo Alto Networks and CrowdStrike is a no-brainer.
“As AI gets smarter, security software will get even more important, because you have to stay one step ahead,” said Sparrow. “You don’t just have people, governments, bad actors trying to access your data, now a whole new army of AI agents can potentially hack you. I expect these stocks to grow faster than other sectors.”
While acknowledging that that AI has become “a tailwind” for cybersecurity stocks, growth investor Sergey Oplanchuk, prefers to focus on their actual performance: how fast their sales are growing, how they are winning new clients and keeping the ones they have.
“This is why cyber stocks are among my largest portfolio positions,” he said.
Crowdstrike is now one of his top five bets, making up 10% of his total investments. Recently, he bought into Palo Alto Networks as well.
The broad Wall Street consensus is that Palo Alto Networks is a solid “buy,” but, as valuations grow, some investors start to consider it overpriced.
“Palo Alto Networks is elevated beyond a threshold we would find attractive for inclusion in our strategies at this time,” said Paisley Nardini, head of investment strategy at New-York based Tema Global, noting that Fortinet currently offers “more attractive entry points for longer-term upside.”
The rest of the software companies would love to have these problems. Instead, their primary concern is survival.
“Despite what [Salesforce CEO Marc] Benioff and others are saying about the end of the “SaaSpocalypse,” I still think that too many of the SaaS companies will be disintermediated by AI,” said Paul Meeks, a head of technology research at Freedom Capital Markets.
Now, it’s up to the market to determine which companies will be left behind by AI.