CIBR ETF: Lags Behind in Cybersecurity Sector's Rapid Growth

Approximately a year has passed since an analysis was conducted on the First Trust NASDAQ Cybersecurity ETF (CIBR), revealing that over half of its assets under management (AUM) were not directly invested in pure cybersecurity companies but rather in associated sectors like semiconductor and IT consulting. Although CIBR's valuation increased by 58%, this performance fell short when compared to individual cybersecurity companies such as Palo Alto Networks (PANW) and CrowdStrike Holdings (CRWD), which saw surges of 90% and 200% respectively.

Comparative Performance

CIBR has outperformed its direct competitor, the Amplify Cybersecurity ETF (HACK), since its inception but has still lagged behind the Nasdaq 100 index. A closer examination of cybersecurity stocks over the past one and five years shows that CIBR's diversified approach has resulted in significant underperformance compared to what might be anticipated from a more focused investment strategy.

Growth Potential Limitations

Despite the modest 11% projected price gain based on consensus analyst price targets for 2024, the growth potential of CIBR is impeded by some of its largest positions in companies like Broadcom (AVGO), Infosys Limited (INFY), and Cisco Systems (CSCO), which are not strictly cybersecurity firms and have lower growth prospects.

Revenue and Profitability

The overall portfolio of CIBR is expected to see a 12% increase in revenue alongside an improvement in profit margins from 18% to 21% over the next few years, primarily driven by the robust demand and scalability within the cybersecurity sector.

Earnings Forecast

Following the trend of expanding margins, the portfolio's consensus earnings per share (EPS) growth rate is over 20%, a metric predominantly influenced by the cybersecurity sector's performance. This statistic, however, is adjusted to reflect a more long-term sustainable growth rate beyond the initial period of transition from losses to profits.

Valuation Metrics

At over 37 times price-to-earnings (PE) based on estimated EPS for 2024, CIBR's portfolio commands a significant valuation, which is justified by the high growth rate of earnings resulting in a price-earnings-growth (PEG) ratio of 1.5x. Stripping away the non-cybersecurity holdings, however, elevates this ratio above 2x, yet still reasonable given strong sector growth prospects.

Strategic Outlook

The Hold rating is maintained for CIBR, acknowledging its underperformance due to the inclusion of non-pure play cybersecurity holdings—a structure unlikely to change unless revised by the Nasdaq CTA Cybersecurity Index. For investors desiring comprehensive exposure to cybersecurity, alternative ETFs or direct stock investments might be more suitable.

CIBR, Cybersecurity, ETF