Software stocks are being "slaughtered" by AI, but cybersecurity stocks may hide opportunities? Investors might be missing out on a good chance.

Zhitong Finance APP learned that this year, stocks in the cybersecurity category were sold off along with the software sector. However, as artificial intelligence (AI) is intensifying the potential threats posed by malicious actors, investors may be missing out on the growing demand for services in this field.

Manthan Shah, U.S. investment director at WestBridge Capital, which manages more than $7 billion in assets, said: “Right now, software investors are all selling first and then looking for reasons, but I believe that when we look back later, we’ll find that this is an excellent time to move into the security space. This is one of our most favored areas of long-term potential.”

For months, software stocks have undergone broad sell-offs because investors worry that products from AI companies such as OpenAI or Anthropic will siphon demand away from traditional vendors, weakening their growth potential and pricing power. In particular, the widespread adoption of so-called “AI agents” (which can complete multi-step processes without human intervention) has posed significant challenges for software-as-a-service (SaaS) stocks.

Cybersecurity software makers have not been immune either. The cybersecurity ETF-Global X (BUG.US) has fallen cumulatively by 15% in 2026, recently closing at its lowest level since November 2023. While this is better than the 31% plunge in the index focused on SaaS, it still lags far behind the S&P 500’s 3.4% decline this year, as well as the 4.2% drop in the tech-heavy Nasdaq 100 index.

But not all software is the same. In terms of cybersecurity, investors may be misreading the situation. Those AI agents that are considered to erode traditional business are also used for malicious purposes— as AI models become more powerful, this risk could become even more pronounced. Hackers have already used AI tools to breach more than 600 firewalls in dozens of countries, including Mexico’s government agencies.

Based on this threat, one view holds that the further spread of AI means customers will need more protection from cybersecurity software.

“AI will also greatly expand the potential attack surface, which means demand for security will grow significantly in an overlapping way in the future,” Shah said.

Taking JFrog Ltd. (FROG.US) as an example. The company, headquartered in Sunnyvale, California, saw its stock price rise 17% in March, posting its best monthly performance since last November, after analysts pointed out that attacks targeting the software supply chain have highlighted the value of its security product portfolio.

In a client report dated March 25, Guggenheim analyst Howard Ma wrote: “As AI agents become more widespread, these types of attacks may only become more common.”

The sell-off stems from news headlines

With market sentiment tense and uncertainty high—whether driven by AI or the Iran conflict—investors are currently extremely sensitive to news headlines. Last month, after a report said an AI model from Anthropic PBC “poses an unprecedented cybersecurity risk,” cybersecurity stocks fell on the spot. A similar situation also occurred in February, when Anthropic introduced new safety features for its Claude AI model.

However, Wall Street believes investors’ reactions may be the opposite, because these developments actually highlight the growing importance of digital security.

In a March 27 report, Baird analyst Shrenik Kothari wrote: “Stronger models increase the need for governance, rather than reduce it.” He called this sell-off “yet another outburst of irrational panic.” Raymond James’s Adam Tindle also held the same view, saying: “The claim that AI will upend the security space is fundamentally wrong, but herd psychology is frustratingly hard to resist, and it can lead to a surrender-style sell-off that ignores fundamentals.”

This also explains why analysts are raising ratings for cybersecurity stocks. Last month, Arete Research upgraded Palo Alto Networks Inc. (PANW.US) from “sell” to “buy,” arguing that the stock’s weakness has been overblown because AI agents are shifting IT budgets toward different types of security products. Crowdstrike Holdings Inc. (CRWD.US) also received multiple rating upgrades. Piper Sandler analyst Rob Owens said AI is an “opportunity, not a substitute threat,” because as enterprises seek to protect new attack surfaces, AI will “create the next multibillion-dollar security market.”

Admittedly, AI developers may ultimately roll out services highly similar to those of traditional providers, which could reignite concerns about disruption—even if overall demand for security services is growing. In addition, cybersecurity stocks are not cheap—at least compared with low-valuation stocks in other areas of the software industry.

For example, Crowdstrike’s price-to-earnings ratio is about 78 times expected earnings, making it the ninth most expensive stock in the S&P 500, even though its valuation has dropped sharply from 128 times in July. Palo Alto Networks’ share price is about 42 times expected earnings over the next 12 months, placing it among the 50 most expensive stocks in the index. Meanwhile, the price-to-earnings ratios of Fortinet (FTNT.US) and SentinelOne Inc. (S.US) are also far higher than those of the S&P 500 and Nasdaq 100 indices.

“It’s hard to say these are value stocks, especially because we need a few years to determine whether growth has truly been disrupted, and in the meantime, this risk simply cannot be disproven,” said Ryan Isherwood, chief investment officer at Significance Capital Management, which holds Palo Alto Networks shares.

“It’s hard to tell whether security stocks will be able to earn the same premium multiples in the future, but it still looks like the best house in the worst neighborhood in the software sector,” he added. “We don’t want to touch a lot of application software stocks, but within software, cybersecurity looks like the best one.”