REPORT: Yields Just Fell the Most in a Year. Each Time Before, Cisco Beat the Market. Here's Why It's Our AI-Security Pick.
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| By Al Qureiyeh |
If you own a cybersecurity fund because artificial intelligence (AI) is making hackers more dangerous, you are right about the threat. You may be paying too much for the protection.
Fortinet (FTNT), one of the largest holdings in the First Trust NASDAQ Cybersecurity ETF (CIBR), fell 20.1% on Thursday after its quarterly report.
Fortinet beat Wall Street's profit forecast, and the attacks it guards against keep getting faster.
Microsoft found that hackers typically turn a newly found software flaw into a working attack in well under a day.
Investors sold anyway. Two reasons fit: hardware sales slowed after, analysts say, some customers bought early, and the shares were priced for fast growth.
The need for security is real, and falling interest rates have not been enough to lift the expensive names. The better way in is a cheaper, BUY-rated company that sells both the network and the protection.
What Happened
The 10-year Treasury yield, the rate that guides mortgages and stock valuations, closed Thursday at 4.98%.
It has fallen more than a quarter point in a month, its biggest one-month drop in a year.
The Federal Reserve (Fed) held rates steady on Wednesday, and traders in interest-rate futures still expect a hike in December.
Lower yields usually help security software, which is valued on profits far in the future.
That did not help F5 (FFIV), which sells equipment that protects web traffic. It fell 20.4% on Wednesday after its report.
F5 said higher memory chip costs will shrink its profit margins next year.
Fortinet cut its forecast for service revenue, the steady subscription income investors value most.
The selling spread on Thursday to CrowdStrike (CRWD), Palo Alto Networks (PANW) and Zscaler (ZS). Cisco slipped with the rest of tech in Friday morning trading.
If you bought Morgan Stanley (MS) on Oct. 27, you are about 3 points ahead of the S&P 500, the large-company index.
We are behind on Valero (VLO), our Oct. 14 pick, by about 15 points. Our four other recent picks are within about 1 point of the index.
Why the Skeptics Have a Point
First, Fortinet and F5 may be early signs of a slowdown that reaches every equipment maker, Cisco included.
Cisco expects its gross margin, the share of sales left after production costs, to slip slightly this quarter.
Second, security is only about 13% of Cisco's sales. So owning Cisco is a broader bet than owning a security fund.
Third, Cisco has been here before. In November 2023, it fell about 12% in a day when customers paused orders to use up equipment they had already bought.
We grant all three, and our first check comes at Cisco's next report.
What Weiss Is Saying
Weiss rates Cisco (CSCO) B, a BUY, with Reward rated B+ and Risk rated C+.
Fortinet and F5 are also rated B, a BUY.
The fast-growing security software companies rate lower. CrowdStrike and Palo Alto Networks are C, a HOLD.
So are CIBR and the Amplify Cybersecurity ETF (HACK), both C, a HOLD.
Avoid Zscaler (ZS), rated D-, a SELL, which already trades above the average Wall Street target.
Friday's Weiss piece, "The Companies Cashing AI's Checks Don't Have a Money Problem," makes a related point.
It says the companies selling chips, memory and networking gear for AI have "more orders than they can fill."
We agree, with one caution. Those same memory chips now cost more for equipment makers such as F5, and Cisco could be next.
Wednesday's Weiss piece, "Fed Holds Rates," argued that futures traders are overpricing a December hike.
Related story: The Companies Cashing AI's Checks Don't Have a Money Problem
Security Stocks Are Priced as if Nothing Can Go Wrong
Investors are split: worried about prices, but sure that security spending keeps growing.
IBM puts the average cost of a data breach at $4.99 million this year.
Breaches in which attackers used AI cost about $6 million on average.
IDC, a technology research firm, expects companies worldwide to spend $308 billion on security this year.
On Oct. 16, three U.S. agencies, including the National Security Agency, issued guidance for incidents in which AI agents act without instructions.
CrowdStrike sells for about 185 times the profit analysts expect next year.
Cisco sells for less than 22 times.
That gap matters when rates move. Our own back-tests show that falling yields have not reliably lifted the expensive security stocks.
In the three separate sharp drops we checked since 2025, Cisco beat the S&P 500 over the next three months.
The First Trust cybersecurity fund beat the index only once.
The Cheaper Way to Own AI Security
Buy Cisco (CSCO), rated B, a BUY, at the next close; it closed Thursday at $108.59.
Cisco owns Splunk, the software security teams use to search their data for signs of an attack.
Its security sales grew 14% in its latest quarter. That was one strong quarter; for the full year, security sales barely grew.
Its networking sales grew 28%.
What could work against it: the memory costs squeezing F5 could also trim Cisco's margin at its next report.
Weiss rates its risk C, a reminder the shares can drop sharply, as they did in 2023.
Thursday's close is about $28 below the average Wall Street target. That is a potential gain of about 25%.
Cisco pays $0.42 a share each quarter while you wait. At Thursday's close, that is a yield of about 1.5% a year.
Our time frame is within a year, with the first check at Cisco's next report, expected Nov. 11.
Hold CrowdStrike (CRWD) and Palo Alto Networks (PANW) if you own them; both are rated C, a HOLD.
What We're Watching
First, Cisco's report, expected Nov. 11. If revenue comes in below $18 billion, we would sell, and we will say so.
We would do the same if its gross margin falls below 65%. A slide in security growth back to single digits would also end the case.
Second, Fortinet, rated B, a BUY, stays on our watch list. After its three earlier one-day plunges, the stock lagged the S&P 500 over the next three months twice.
Check Point (CHKP), rated C, a HOLD, reports Nov. 2, and Palo Alto Networks is expected Nov. 18. If both show subscription growth holding up, Fortinet's slowdown is its own.
We would buy Fortinet once its subscription revenue stops slowing.
Third, the Fed's December meeting. If the Fed hikes and the 10-year yield returns to its October high, we expect the priciest security stocks to fall the most.
Bottom Line
AI has made hacking faster and more costly, and companies will keep paying to stop it. The selling on Wednesday and Thursday was about slower hardware sales, a cut to a service forecast and rich prices, not about the threat.
Hold CrowdStrike (CRWD) and Palo Alto Networks (PANW) if you own them, and avoid Zscaler (ZS).
So, if you own a cybersecurity fund because AI is making hackers more dangerous, add the cheaper way to own the protection. Buy Cisco (CSCO), rated B, a BUY, which closed Thursday at $108.59, at the next close.
Take care,
AL Qureiyeh
