Software stocks have had a bruising year. Why cybersecurity has been a relative outperformer

Published Tue, Apr 1 20253:21 PM EDT

Software stocks have struggled this year, but cybersecurity is proving to be an exception. It's a reflection that businesses — and, in our opinion, investors — cannot do without the services that cybersecurity companies provide, making these stocks a relative bright spot in a shaky market for tech. Through Monday's close, a popular exchanged-traded fund tracking the broader software industry — iShares Expanded Tech Software Sector ETF (IGV) — is down 11.1% year to date. Meanwhile, the First Trust Nasdaq Cybersecurity ETF (CIBR) is down just 0.6%. Another cyber-focused fund, the Amplify Cybersecurity ETF (HACK), has dropped 3.6% this year. Both cyber ETFs have pulled back from their February highs, but to a smaller degree than the IGV. What we're seeing with cyber stocks is their "mission criticality," said Shaul Eyal, analyst at TD Cowen in an interview with CNBC. Given the increasing threat of cyber attacks, cybersecurity is the No. 1 spending item for companies. "You cannot cut that right now" Eyal said. That is providing top cybersecurity companies with a "higher degree of isolation" in an uncertain economy and therefore puts them in a "safer zone" to be insulated from a potential downturn, the analyst said. CrowdStrike , known for its Falcon cloud security offering, is one of the Club's best-performing stocks in 2025, up 3% through Monday. Cyber peer Palo Alto Networks is lower year to date, losing 6%, but that's far better than a non-cyber software firm levered to the artificial intelligence trade such as Salesforce , which has lost almost 20%. The point is not that cyber stocks are as defensive as, say, drugmakers — rather, our view is that within technology, these companies remain well-positioned to navigate macroeconomic pressures because businesses can't afford to cut back on protecting sensitive data or automating security operations amid rising cyber treats. IGV PANW,CRWD YTD mountain The IGV software ETF versus CrowdStrike and Palo Alto Networks so far this year. To be sure, there are negative considerations, at least in the short run, that investors need to monitor. That includes the broader economic environment and what that may do to deal cycles, according to analysts at Jefferies. The Wall Street firm on Sunday cut its price targets on software stocks including Palo Alto Networks ($215 from $240) and CrowdStrike ($410 from $425), despite keeping buy ratings on both names. The firm's latest checks in the sector "have not shown any concrete pauses/cancellations or material change in behavior," but analysts cautioned that "if macro uncertainties persist, they could affect deal cycles, especially for large enterprise contracts." Get Your Ticket for the Annual Meeting! Secure your ticket today for the CNBC Investing Club's upcoming 3rd Annual Meeting on May 2nd in Orlando, Florida! Federal spending cuts are another overhang on the group and could be behind at least some of the declines since February. The Trump administration's Department of Government Efficiency, led by Elon Musk, has aggressively canceled contracts, terminated leases and reduced agency workforces in an attempt to lower federal spending. These actions have raised concerns about potential impacts to IT spending and software companies with government contracts. ServiceNow , a provider of workflow automation software whose public-sector business grew nearly 40% last year, is among the firms potentially affected. The company has said the administration change could lead to more federal revenues coming in the latter part of its fiscal year than normal. However, in early March, CEO Bill McDermott said he hadn't seen "any evidence of the headwind" at that time. Nevertheless, federal spending changes has been cited in two recent price target cuts for ServiceNow, which is down more than 24% year to date. Palo Alto said on its mid-February earnings call that its federal business remained stable in its November-to-January quarter. The company emphasized that much of its government revenue comes from long-standing contracts and renewals, which are less vulnerable to sudden budget shifts. More recently, Jim Cramer pressed Palo Alto CEO Nikesh Arora on what DOGE's efforts will mean for the company. While Arora described the current moment as an "unsettling period," the chief executive said the government's efficiency efforts over time should be fruitful for all technology companies. "One of the biggest opportunities as we get through the phase of cost cutting is automation and efficiency driven by technology," Arora told Jim in an interview on CNBC . "I expect DOGE will be able to get where it wants to get – to a much more efficient, lower cost operation – is to automate a lot of stuff." CrowdStrike, for its part, also has struck an upbeat tune. "A new administration, a new wave of technology, and a new threat landscape necessitate all businesses to evolve their cybersecurity programs," CEO George Kurtz said on its early March earnings call. "Consolidation, cost reduction and automation are now the accepted enterprise and federal priorities." As the general threat landscape gets more active, Palo Alto and CrowdStrike have both positioned themselves to benefit from that consolidation trend. Palo Alto refers to it as "platformization" and has oriented itself around that strategy. "Platformization, without a doubt, is a massive trend benefitting Palo Alto that's helping companies operate more efficiently today" said TD Cowen's Eyal, who has a $230 price target and buy rating on Palo Alto shares. Large companies interacting with dozens of providers see it as "a headache to manage all these disparate small solutions," Eyal explained, adding to the appeal of a "one-stop shop" approach to cyber. "Companies want a solution that can consolidate all these categories into one cohesive end-to-end platform." This is what Palo Alto is doing, and Eyal projects that this trend is set to accelerate in the near to mid-term. CrowdStrike's consolidation strategy, meanwhile, revolves around its Falcon platform, which combines multiple cybersecurity tools in a single cloud-based system. Bottom line The market volatility hasn't dimmed Jim Cramer's enthusiasm for cybersecurity's growth trajectory. We continue to believe cybersecurity is multi-year theme that has legs in the years ahead and expect Palo Alto Networks and CrowdStrike to be ahead of the pack. The proliferation of data in the world — thanks to the growing number of smart devices, through remote work and other areas — is ripe for hackers to exploit. The adoption of artificial intelligence by bad actors only compounds the issue. That omnipresent threat is what makes Palo Alto and CrowdStrike's tools so necessary. Of course, though, we don't expect that these stocks will go up every single week. Stocks don't work that way. But when there is volatility, we try to use it to our advantage because we believe the long-term cybersecurity trend is still intact. We used the March pullback in CrowdStrike to add to our position twice , and the stock ultimately bounced nicely not long after those purchases. We have a buy-equivalent 1 rating and price target of $400 a share on CrowdStrike. For Palo Alto, we're sticking with our 2 rating , which means wait for a pullback before buying more, and a price target of $225. (Jim Cramer's Charitable Trust is long PANW, CRWD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A sign is posted on the exterior of a CrowdStrike office in Sunnyvale, California, on July 30, 2024.

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Software stocks have struggled this year, but cybersecurity is proving to be an exception.