Cybersecurity stocks have been sold off alongside the software sector since the start of this year. However, as artificial intelligence intensifies the potential threat of malicious attacks, investors may be missing out on the rising demand for services in this field. Manthan Shah, Head of U.S. Investments at WestBridge Capital, which manages over $7 billion in assets, stated that the current sell-off in software stocks is irrational. Looking back, he believes this may prove to be an excellent time to enter the cybersecurity space, which his firm identifies as one of the most promising long-term potential areas.
For months, the market has worried that products from AI companies such as OpenAI or Anthropic would divert demand for traditional software, weakening its growth and pricing power, leading to a broad sell-off in software stocks. In particular, the proliferation of “AI agents” (technologies capable of autonomously completing multi-step processes) has posed significant challenges to software-as-a-service stocks. Cybersecurity software manufacturers have not been spared. The Global X Cybersecurity ETF (BUG) has fallen 15% in 2026, recently closing at its lowest level since November 2023. Although this performance is better than the 31% plunge in the SaaS-focused index, it still lags far behind the S&P 500 and the Nasdaq 100 over the same period.
But not all software faces the same fate. In the case of cybersecurity, investors may be misreading the situation. The same AI agents believed to erode traditional businesses are also being used for malicious purposes, and this risk becomes more pronounced as AI models grow more powerful. Hackers have already used AI tools to breach over 600 firewalls across dozens of countries, including Mexican government agencies. Given this threat, the further proliferation of AI means customers will require more protection from cybersecurity software. Shah pointed out that AI will greatly expand the potential attack surface, and security demand will see significant, compounding growth in the future.
Take JFrog Ltd. (FROG) as an example. Its stock rose 17% in March, its best monthly performance since November of last year, as analysts noted that attacks on software supply chains highlighted the value of its security product portfolio. Guggenheim analyst Howard Ma also believes such attacks will only become more common as AI agents proliferate.
Due to tense market sentiment and high uncertainty, investors are highly sensitive to headlines. Last month, following reports that an Anthropic AI model posed “an unprecedented cybersecurity risk,” security stocks fell accordingly. However, Wall Street believes investor reactions may be exactly backwards, as these developments actually underscore the growing importance of digital security. Baird analyst Shrenik Kothari stated that more powerful models only increase the need for governance, calling the sell-off “yet another burst of irrational panic.” Raymond James’ Adam Tindle also noted that the argument that AI will disrupt the security sector is fundamentally wrong.
This explains why analysts are upgrading cybersecurity stocks. Arete Research upgraded Palo Alto Networks Inc. (PANW) from “sell” to “buy,” arguing that the stock’s weakness has been overblown. Crowdstrike Holdings Inc. (CRWD) has also received multiple upgrades, with analysts viewing AI as an “opportunity, not a replacement threat,” one that will create the next billion-dollar security market.
Of course, risks persist. AI developers may eventually launch services highly similar to those of traditional providers, reigniting disruption concerns. Furthermore, cybersecurity stocks are not cheap. For example, Crowdstrike trades at roughly 78 times forward earnings, and Palo Alto Networks at about 42 times—both well above broader market indices.
