Is it time to revisit Cybersecurity and Cloud?

In 2021, cybersecurity and cloud stocks could do no wrong.

They had everything investors wanted: huge markets, rapid growth, strong secular tailwinds, and just enough complexity to sound irresistible. Then Covid poured fuel on the fire. Work moved online, data moved to the cloud, cyberattacks surged, and interest rates fell to the floor.

That was the perfect setup for a hype cycle.

But five years on, many of the market darlings from that era have badly underwhelmed. Some collapsed, others kept growing, but their share prices still went nowhere.

That leaves us with the real question: did the industries actually disappoint or did investors simply get ahead of themselves back then?

Welcome is part 2 of our three-part “What’s happening with…” series, where we look at previously hyped up sectors (that now aren’t as hyped), and see whether they’re still worth looking at.

What happened in the markets this week?

🌍 US economic growth slows sharply as Q4 GDP revised lower ( AP News )

• What happened: The US Commerce Department downgraded Q4 GDP growth to an annualized 0.5%, down from the previous estimate of 0.7%. The slowdown followed stronger growth earlier in the year and was partly attributed to reduced government spending during a 43-day shutdown.

• How it impacts investors: Slower economic growth may signal weakening demand and could influence expectations around interest rates and equity market performance. Investors may see increased volatility as markets reassess the economic outlook.

• Next steps: Explore diversified opportunities across global markets using our investing ideas.

🛢️ Markets rally as Iran ceasefire eases oil supply concerns ( Al Jazeera )

• What happened: Oil prices fell sharply while global stocks and bonds rallied after US President Donald Trump announced a two-week ceasefire with Iran. The agreement raised expectations for the resumption of oil and gas flows through the Strait of Hormuz, a key global energy transit route.

• How it impacts investors: The easing of geopolitical tensions may reduce energy price volatility and support broader market sentiment, particularly benefiting sectors sensitive to fuel costs and global trade.

• Next steps: Read our previous edition of Market Insights, where we spell out how to invest during crisis in the Persian Gulf.

🤖 Meta expands AI ambitions with $21B CoreWeave cloud deal ( Reuters )

• What happened: Meta has deepened its partnership with CoreWeave through a new $21B agreement for additional AI cloud computing capacity, extending through December 2032. The deal provides Meta with early access to Nvidia’s next-generation Vera Rubin chips and builds on a previous $14.2 billion agreement.

• How it impacts investors: The agreement underscores escalating capital investment in AI infrastructure, reinforcing growth prospects for companies across the semiconductor and cloud computing value chain.

• Next steps: Review Meta’s and CoreWeave’s company reports and determine whether the latest news is material to their future financial performance.

🧠 Anthropic explores developing proprietary AI chips ( Reuters )

• What happened: Anthropic is exploring the possibility of designing its own AI chips as part of efforts to address industry-wide shortages, though plans remain in the early stages and may not proceed. The company’s annualized revenue run rate has surpassed $30 billion amid accelerating demand for its Claude AI models.

• How it impacts investors: The move highlights intensifying competition and vertical integration within the AI ecosystem, potentially benefiting semiconductor and cloud infrastructure providers tied to AI compute demand.

• Next steps: Discover high-growth opportunities in the global AI sector.

🚀 SpaceX outlines record-breaking IPO plans with strong retail investor interest ( Reuters )

• What happened: SpaceX is preparing for a potential IPO aiming to raise about $75 billion and could be valued at up to $1.75 trillion, with a roadshow planned for early June. The company also intends to allocate a significant portion of shares to retail investors and host approximately 1,500 of them at a dedicated investor event.

• How it impacts investors: A listing of this scale could reshape capital flows into the aerospace and space technology sectors while providing rare access for retail investors to participate in one of the world’s most valuable private companies.

• Next steps: Read our previous edition of Market Insights which talks about SpaceX potentially being one of this year’s largest IPOs.

👟 Nike tumbled after weak outlook despite earnings beat ( CNBC )

• What happened: Nike reported fiscal Q3 revenue of about $11.3 billion and earnings per share of $0.35, both exceeding expectations, but forecast a 2% to 4% decline in revenue for the next quarter. The disappointing outlook and ongoing margin pressure from tariffs triggered an approximately 11% drop in the company’s share price.

• How it impacts investors: The guidance highlights ongoing challenges in the global consumer discretionary sector, with tariff pressures and slowing demand potentially weighing on earnings and sentiment toward retail stocks.

• Next steps: Review Nike’s fundamentals and valuation to assess its long-term investment potential.

So what caused the fall of cybersecurity and cloud stocks?

The annualized return of Cybersecurity ETFs over the last five years according to ETF Database ranged from 0.5% to 8.9%, while Cloud Computing ETFs returned between -10.9% to 8% p.a. In contrast, the S&P 500 returned an annualized 11.7% over the same time period.

So what caused this underperformance?

After looking through the data, the short answer is: the story stayed good but the price paid for these stocks was too high.

1️⃣ The first problem was macro. In 2020 and 2021, low interest rates made long-duration growth assets incredibly attractive. Investors were happy to pay them for profits that might only show up years down the track. Once inflation surged and central banks started hiking rates, that was no longer as attractive - money was no longer cheap, so future earnings became less valuable and richly valued growth stocks tend to feel that first.

2️⃣ The second problem was valuation. By 2021, a lot of cloud and cybersecurity stocks were priced for perfection. Not for success… perfection. That meant no room for slower than expected growth, tougher competition, longer sales cycles, or even the slightest stumble. Once the market stopped handing out heroic multiples, the repricing was brutal.

3️⃣ The third problem was that pandemic demand pulled a lot of spending forward. Businesses rushed into digital transformation, cloud migration, collaboration software, and cyber protection all at once. That made growth look spectacular for a period but it also set up much harder comparisons later. Once the emergency phase faded, so did some of the urgency in spending.

A few other factors also made the selloff worse:

1. enterprise customers became more cost-conscious as rates increased
2. cloud spending started being optimised rather than simply expanded
3. larger platforms began bundling more functionality
4. investors started caring about margins and free cash flow again

That last one was especially painful for the pure-play names. When the market mood is euphoric, losses are often treated as a charming personality trait. But when sentiment turns, they suddenly become a serious issue.

💡The biggest losers were usually the companies caught in one of two traps. Either they were genuinely weak businesses that had been swept up in the hype or they were decent businesses whose valuations had drifted so far into fantasy that even good execution was not enough.

That is an important distinction. Some of these stocks fell because the business model cracked. Others fell simply because investors had paid 30 times tomorrow’s hopes.

With that said, are these two industries still worth being in your watchlist? Is it a good time to get into them as an investor? Let’s take a look.

Cybersecurity in 2026: now an inescapable requirement

Long story short, cybersecurity has moved from being the 2021 narrative of “fast-growing subsector of tech” to 2026’s “regulatory requirement.”

The threat landscape is worse - attacks are now more frequent, more sophisticated, and more expensive. Regulation has also tightened with new regulations not just for each country but for each industry.

Morgan Stanley expects the industry to grow at 12% a year through to 2028, and their research also shows that CIOs expect cybersecurity spending to grow a massive 50% faster than other areas of software spending.

Demand is now also shifting away from fragmented point products towards unified platforms as executives try to increase cost and operational efficiencies.

That matters for investors because it changes where the value sits. The strongest businesses are increasingly the ones that become embedded in a customer’s wider security stack rather than just solving one narrow problem well.

The winners of cybersecurity stocks were those with scale

While the industry kept progressing, the stocks within it did not move in one direction.

• The names that proved more resilient were category leaders, which brought scale and multiple functionalities. CrowdStrike (+109% past five years) and Palo Alto Networks (+191%) for example held up better than most. When investors became pickier, those businesses still had a strong case for premium valuations.
• Meanwhile, single-platform ones struggled to maintain momentum. Zscaler (-23% past five years), Okta (-68%), and SentinelOne (-70%) for example remained tied to attractive parts of the market, but is also an example of how a strong business can still be a poor stock at the wrong starting price. Investors had paid a bit too much for future growth, and once the market became less generous, share prices suffered.

💡We’ve compiled a watchlist of pureplay cybersecurity stocks that have been popular with retail investors over the last few years.

Cloud: no longer an option for businesses

Cloud has gone through an even larger shift than cybersecurity.

In 2021, cloud was mainly sold as a migration story. Businesses would move away from on-premise infrastructure and gain flexibility and scale by moving systems on a cloud.

Today, cloud has now become the infrastructure for modern businesses. The global cloud market is now worth $913B, leagues higher than the $156B in 2020.

The cloud is behind software, data storage, analytics, collaboration, and increasingly AI workloads, among all others. Businesses are no longer asking whether they need cloud - they are now asking how efficiently they can use it, who they should buy it from, and what area of it to invest in the most.

And that maturity has changed the way the market values the sector. The numbers show that investors no longer reward every cloud-linked business just for standing near the trend. They want proof of staying power.

Cloud stocks

Cloud produced some of the clearest examples of hype outrunning reality in 2021.

• Zoom (-74% past five years) is probably the most obvious case. It became one of the defining winners of the pandemic era, but that success also pulled a huge amount of demand forward. Once the world normalised, investors had to stop treating it like an unstoppable growth story and start valuing it more like a maturing software business.
• Fastly (-52%) is a different type of lesson. It captured a lot of excitement but has only recently started showing stronger financial performance which led to it being up 220% YTD.
• Then there were names like Snowflake (-34%) and Dropbox (-16%). These were stronger operational businesses than the market’s bigger disappointments, but they were also priced so aggressively at the peak that longer-term shareholders are still waiting to get back into green.

Want to look for more companies in this sector? This screener filters for companies in the “Systems Software” industry, which holds a mix of both cybersecurity and cloud computing stocks.

IAAS, PAAS & SAAS

Now cloud is usually discussed as one giant category, but we thought it best to break it down as an extra piece of insight for investors.

The main subsectors of cloud are infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS), which are very different businesses with very different economics.

IaaS is the base layer: compute, storage, and networking. It is essential and dominated by the biggest players.

PaaS sits above that. It gives developers tools to build and run applications more efficiently. It can benefit from ecosystem effects and customer stickiness, but it still sits close enough to infrastructure that competition matters a lot.

SaaS is the layer investors are most familiar with, which are subscription software like Google Drive and often also used by everyday consumers. It offers recurring revenue, visible growth, high gross margins, and wonderful narratives. Unsurprisingly, it was also the part of the stack where valuation excess often became most extreme.

Either way, if you’re looking to invest in cloud computing stocks, knowing where they are in the pyramid could lead to very different outcomes.

AI: Strong catalyst for both cybersecurity and cloud

And in contrast with the state of the market in 2021, AI is now the clearest new catalyst for both cybersecurity and cloud.

Synergy estimates the cloud infrastructure market will hit $330 billion in 2024, and says GenAI has driven at least half of cloud revenue growth since ChatGPT launched.

It is also creating new pockets of growth. Neocloud is a new subset of the cloud industry, which focuses on GPU-heavy AI infrastructure on the cloud. The segment grew at 205% YoY last year and could reach almost $180 billion by 2030. AI is not just lifting the biggest cloud players but creating a whole new layer of infrastructure demand.

For cybersecurity, AI is a bit different. It helps defenders move faster, but it also helps attackers scale. IBM estimates 13% of companies reported an AI-related security incident and 97% of those affected said they lacked proper AI access controls. Many experts also point to growing risks from shadow AI, deepfakes, identity attacks, and agentic systems acting with too little oversight.

For retail investors, the key is not to treat AI as the next 2021 hype trade but to understand the impact of AI in these industries and what companies are making steps with this backdrop. In cloud, AI is lifting infrastructure demand first. In cybersecurity, it is making security spend even harder to avoid. That should favour scaled platforms and infrastructure providers more than smaller names simply adding AI to the pitch.

💡 The Insight: Choosing the right stock in a crowded industry is more important now

The short answer: yes. But not in the lazy way they once were.

Investors can no longer just buy “a hot theme” and expect the multiple to do all the work. That does not mean the opportunity is gone, it just means the standard is higher now.

For experienced investors the key shift is this: these sectors now need to be judged less like stories and more like businesses.

That means asking better questions:

1. Is revenue growth still durable or was it pulled forward?
2. Are margins improving or is scale still not showing up in the numbers?
3. Does the company have a genuine platform advantage?
4. Is it becoming more essential to customers or more replaceable?
5. Can it survive a world where customers want consolidation and not another point solution?

Cybersecurity still looks attractive because it's now essential. After all, very few boards are eager to save money by becoming easier to hack. Meanwhile, cloud now matters more than ever because it is no longer optional infrastructure, it is the infrastructure.

But both sectors are more selective now. Investors need to separate “important industry” from “good stock.” Those are related ideas, but they are not the same thing.

Key events next week

Tuesday

• 🇨🇳 Balance of Trade
  • Forecast: $105B , Previous: $214B
  • Why it matters: China’s export strength is central to global trade imbalances and a key gauge of how well Chinese demand is holding up amid tariff tension and slower global growth.
• 🇺🇲 PPI MoM
  • Forecast: 0.5% , Previous: 0.7%
  • Why it matters: Producer costs are being watched for signs that higher energy prices and renewed supply-chain pressure could keep inflation sticky and delay further rate cuts.

Thursday

• 🇨🇳 GDP Growth Rate (YoY)
  • Forecast: 4.6% , Previous: 4.5%
  • Why it matters: GDP growth matters now because markets are watching whether Beijing can keep growth resilient enough to avoid more stimulus as global uncertainty rises.
• 🇨🇳 Industrial Production (YoY)
  • Forecast: 5.4% , Previous: 6.3%
  • Why it matters: Shows whether factory activity is staying firm despite weaker global trade conditions. Lower activity can impact multiple suppliers globally.
• 🇨🇳 Retail Sales (YoY)
  • Forecast: 3.5% , Previous: 2.8%
  • Why it matters: Investors want to see whether domestic consumption is strong enough to support growth as China tries to rely less on exports.
• 🇬🇧 GDP (MoM)
  • Forecast: 0.1% , Previous: 0%
  • Why it matters: With inflation risks still elevated globally, any sign of weak or resilient growth could quickly shift expectations for the Bank of England and the GBP.

Saturday

• 🇯🇵 Inflation Rate (YoY)
  • Forecast: 1.5% , Previous: 1.3%
  • Why it matters: Higher oil costs, a weak yen, and debate over further BOJ rate hikes have made every inflation print more important for markets.

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Simply Wall St analyst Stella and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. Any comments below from SWS employees are their opinions only, should not be taken as financial advice and may not represent the views of Simply Wall St. Unless otherwise advised, SWS employees providing commentary do not own a position in any company mentioned in the article or in their comments.We provide analysis based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.