Rize Cybersecurity and Data Privacy ETF Turns a Corner

Since reaching a record high in 2021, venture capital in cybersecurity start-ups has been tumbling: in Q2 of 2023, funding fell even further, and was down 63% year-over-year. Nevertheless, corporate spending on cybersecurity services throughout 2022 and Q1 2023 remained resilient. Companies like Gen Digital and Qualys are among those leading the gains.

• The Rize Cybersecurity and Data Privacy ETF has gained 12% year-to-date.
• CrowdStrike has beaten analyst estimates in the last four quarters.
• Global cybersecurity market set for CAGR of 12.4% through 2027.

The Rize Cybersecurity and Data Privacy ETF [CYBR.L] seems to have turned a corner after a poor 2022, and has gained 11.7% year-to-date. Over the past week, however, it is down 4.7%.

After reaching a record high in 2021, venture capital in cybersecurity start-ups fell by a third in 2022, according to Crunchbase. In the second quarter (Q2) of 2023, venture funding fell even further, to slightly more than $1.6bn — a 63% decrease from the $4.3bn start-ups received in Q2 2022.

Nevertheless, corporate spending on cybersecurity services throughout 2022 and Q1 2023 remained resilient, according to Morningstar analysts.

A May report by the Business Research Company estimates that the global cybersecurity market has been growing at a CAGR of 11% since 2017, and reached $201.3bn last year. Between 2022 and 2027, the market is forecast to grow at a rate of 12.4%, to $360.4bn.

CYBR is Europe’s first cybersecurity and data privacy ETF, but 79.9% of the fund’s exposure is to US companies as of 31 July. The fund tracks the Foxberry Tematica Research Cybersecurity & Data Privacy Index, and 64.1% of its exposure is to cybersecurity services, while 35.9% goes to products.

Solid fundamentals

The fund’s top performer in 2023 as of Monday is CrowdStrike [CRWD], the Texas-based provider of cloud workload and endpoint security, threat intelligence and cyberattack response services. CrowdStrike is up 39.4% year-to-date but down 3.7% in the past week.

The company has produced strong top- and bottom-line growth this year. In the last four quarters, CrowdStrike has outdone estimates, delivering an average earnings surprise of 19.2%, according to analysts polled by Zack’s.

The Rize fund’s largest holding as of 21 August is Gen Digital [GEN], formed from the November 2022 merger of NortonLifeLock and Avast, with a weighting of 5.96%, reflecting the fund’s bias away from the big-name vendors of the sector. On 3 August, Gen Digital reported 34% year-over-year growth in Q1 revenues to $946m, beating Refinitiv analyst consensus of $945.4m. Its shares jumped 3.7% that day in after-hours trading

The second-largest holding is Qualys [QLYS], at a weighting of 5.86%. The California-based company provides cloud-based IT, security and compliance solutions. Qualys is up 29% year-to-date but down 4.1%. in the past week.

Outlook for the Rize ETF

Cybersecurity looks set to remain a top spending priority for companies serious about protecting their data and their businesses, as the threat from cybercriminals continues to develop both in scale and severity.

In July, the US Securities and Exchange Commission further incentivised companies to increase their cybersecurity spend by introducing two cybersecurity incident disclosure regulations. These require publicly traded companies to disclose cyberattacks within four business days and provide annual information on cybersecurity risk management and board oversight.

Out of 41 analysts offering 12-month price targets for CrowdStrike, a median target of $175.00 represents a 19.21% increase on the last closing price of $146.80. Out of 46 analysts providing ratings, 12 analysts rate the stock a ‘buy’, 29 say it will ‘outperform’ and five advise to ‘hold’.

Among the 17 analysts offering 12-month price targets for Qualys, the median estimate of $140.00 represents a 3.30% downside from the last closing price of $144.78. Out of 20 analysts providing ratings on the shares, three rate them a ‘buy’, one says they will ‘outperform’, 12 advise to ‘hold’, three say they will ‘underperform’ and one says ‘sell’.