BUG - 2024 May Offer A Great Buying Opportunity For Global X Cybersecurity ETF

2023-12-12 09:14:21 ET

Summary

• 47% of cybersecurity professionals anticipate cutbacks in their departments, including layoffs and budget cuts.
• Many firms in the cybersecurity industry forecasted soft billings for FY24.
• Despite near-term challenges, sell-side analysts maintain focus on long-term trends and project significant growth in cybersecurity spending.

Cybersecurity is one of the few industries that’s recession proof; at least that was the old adage. The Wall Street Journal reported on October 31, 2023, that even cybersecurity departments are now facing pressure to reduce spending as many anticipate a recession on the horizon. According to the article, 47% of the 14,865 cybersecurity professionals surveyed suggested some form of cutbacks within their departments, whether it be layoffs, budget cuts, or hiring and/or promotion freezes. Near-term, Elliot Wave Theory would suggest the Global X Cybersecurity ETF ( BUG ) will trend up to around $29-$30/share before retracing down to $20/share by the end of q1’25 for a -28% pullback. I provide BUG a long-term SELL recommendation with this price target in mind.

Comparing BUG to its counterpart, ETFMG Prime Cyber Security ETF ( HACK ), BUG is significantly more concentrated in cybersecurity pureplays as opposed to diversifying across aerospace & defense, communications, and professional services. Though that’s not necessarily a bad thing for a thematic portfolio, it can potentially hold greater risk to thematic swings in the market, especially as company forecasts for FY24 have been coming in softer than analysts’ expectations.

Despite these challenges, sell-side analysts appear to be less concerned with near-term challenges and maintain focus on the long-term trends. For example, CrowdStrike ( CRWD ), Palo Alto Networks ( PANW ), Fortinet ( FTNT ), and Zscaler ( ZS ) all forecasted weaker than expected billings for FY24 as the macroeconomic picture for CY24 isn’t very clear.

Cybersecurity is often viewed as shielded from economic downturns, while high-profile cyberattacks spur investment in security programs. Nonetheless, several cybersecurity companies have announced layoffs this year. Vendors that supply them have struggled recently in part because of budget pressure on many of the companies they serve.

WSJ

Though this article shouldn’t be taken as a complete indicator for a slowdown in the industry, it can signal deeper macro challenges as maintaining the cybersecurity department has historically been a priority as liability for breaches can potentially fall upon the CEO if mitigation efforts are neglected. One factor to note is that much of the cybersecurity operations are actively being automated using AI/ML technologies. Research by Deloitte suggests the market for cyber AI technology and tools can grow by $19b by 2025 from 2021 spending. I believe AI/ML technologies will become more prominent as faster networks are implemented with the adoption of 5G technology and faster datacenter networking capabilities. This will also be necessary as more critical infrastructure is modernized and connected to accommodate for intermittent power source cutover. I believe the Colonial Pipeline breach in 2021 brought this factor to the market’s attention.

More broadly, Gartner projects spending on cybersecurity solutions to grow from $150b in 2021 to $415b in 2030. With the strong runway, this thematic portfolio should perform in the long-run net of short-term noise.

I believe the broader market dynamics can drive this portfolio strategy down to around $20/share as the corrective wave completes before reversing into a bullish wave trend in 2025. From there, the portfolio has the potential to move up to $30/share and beyond as the bullish trend sets.

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