We’re Raising Our Price Target on This Cybersecurity ETF

After lifting our Apple (AAPL) price target yesterday, we are making further progress revisiting a few other Pro Portfolio holdings, including the First Trust Nasdaq Cybersecurity ETF (CIBR). Our underlying thesis for the ETF is that cyberattacks are on a growth vector that is being amplified by the rising adoption and expanding usage of AI by bad actors. We’ve shared numerous examples of that, and odds are that volume of signals isn’t going to slow down much, if at all.

That growing cybersecurity pain point, as companies and other entities look to protect their assets, IP, and other crown jewels, is expected to drive cybersecurity spending to more than $520 billion by 2031. The math behind that equates to a 7.6% compound annual growth rate over the ensuing years. Backing that forecast from the Futurum Group is a survey of more than 900 enterprise cybersecurity buyers globally. The survey’s findings flagged cloud security, security operations and governance, risk and compliance, data security and application security as the fastest-growing segments inside that spending. 

Reviewing that list, we continue to favor the diversified exposure CIBR brings to the Portfolio, and we are raising our price target to $105 from $85. As we make this move, we are also adjusting our CIBR checkpoint to $75 from $70. As holdings in CIBR’s basket report their quarterly results, we’ll look to revisit those figures as needed.  

Before we move on, let’s take a moment to discuss CIBR’s holdings and share a thought or two on purity levels. For those unfamiliar with the term “purity levels,” we’re referring to the degree to which the holdings in the underlying basket reflect an ETF’s stated investment strategy. In the case of CIBR, we all know the stated strategy is capturing spending on cybersecurity. Easy peasy. 

Looking at CIBR’s top holdings, the first three are Palo Alto Networks (PANW), Fortinet (FTNT), and CrowdStrike (CRWD). The next two, Broadcom (AVGO) and Cisco (CSCO), both have exposure to cybersecurity across their business models and profits, but it isn’t the primary driving force behind them. Cisco’s Security segment accounts for ~13% of its revenue stream, while at Broadcom that exposure is closer to 10%-15%. 

Those percentages equate to around $10 billion-$15 billion in revenue for Broadcom and $8 billion-$10 billion at Cisco, which means their respective cybersecurity businesses are considerably larger than those for Palo Alto Networks, Fortinet, and CrowdStrike. That’s the likely argument for why they are included in CIBR: their size in the cybersecurity market, even though it is a relatively small part of their overall businesses. Still, relative to the CIBR strategy, AVGO and CSCO shares pull down the basket’s overall purity. 

Now you may be saying, “Chris, this seems like small potatoes in the grand scheme of things.”

Admittedly so, but as you review other ETFs you own or are considering, be sure to check the holdings to ensure the basket properly reflects the stated strategy. Some ETF issuers draw a line in the sand at 50% revenue exposure. When we build our thematic and targeted exposure strategies and corresponding models at Tematica Research, the hurdle for us is at least 80% revenue exposure and preferably more than 90%. That ensures high purity levels. And when possible, we prefer to use operating profit figures over revenue. 

To close things out, we’re likely to get a question as to whether CIBR’s overall purity score warrants keeping it in the Portfolio. After accounting for the exposure discussed above for AVGO and CSCO shares, the answer is “yes.”

 More Pro Portfolio:

Weekly Roundup: Portfolio Extends Lead, Adds Firepower Ahead of Earnings Season

Adding to 3 Portfolio Holdings, Resetting 2 Checkpoint Levels

30 Signals Across the Portfolio’s 10 Themes and Strategies

At the time of publication, TheStreet Pro Portfolio is long AAPL, AVGO and CIBR shares.