Zscaler, SentinelOne jump 10% as cybersecurity re-rating lifts laggards

Zscaler and SentinelOne each jumped 10% Thursday as a cybersecurity re-rating swept through the sector, pushing the First Trust NASDAQ Cybersecurity ETF up 7% to $99.83 and lifting names the market had written off.

The move extends a rally that began with strong Q2 earnings from cybersecurity leaders. Okta shares skyrocketed 20% and CrowdStrike surged 15% after reporting results that beat expectations, as rising AI-driven threats expand the addressable market for security software. The S&P 500 is tracking for earnings growth of almost 32% in Q2, well above projections of 23%, according to Bloomberg Intelligence.

Thursday's surge marks a sharp reversal for the sector. Just a week earlier, cybersecurity stocks retreated after Axios reported that CrowdStrike CTO Zaitsev was leaving the company to launch an AI-cyber fund. CrowdStrike closed down more than 5%, while Okta, Zscaler, and Cloudflare each fell more than 4% on that news. The latest rally suggests investors are looking past the executive departure and refocusing on fundamental demand drivers.

The re-rating has implications beyond the two biggest movers. Cloudflare, which trades at roughly 40x trailing sales with a market cap near $108 billion, closed up more than 4% Thursday. The broader CIBR ETF's 7% gain to $99.83 reflects significant capital inflows into the security sector, which could attract further momentum buying and lift other underperforming names in the space.

The rotation into laggards marks a notable shift in a sector that has been led by a handful of large-cap names through the earnings season. Zscaler, which had underperformed its peers, is now catching up as investors broaden their exposure to the cybersecurity theme. SentinelOne, the endpoint security vendor, has similarly lagged the group's leaders and is now seeing renewed buying interest.

The demand backdrop remains supportive. AI adoption is creating new attack surfaces that require security solutions, from AI-powered threat detection to identity and access management. This is translating into strong revenue growth across the sector. Cloudflare reported revenue of $2.51 billion over the trailing twelve months, with the company noting that about 20% of the internet runs behind its intelligent global network.

Earnings Momentum Is Broad-Based

The earnings strength extends beyond cybersecurity. Roughly 86% of the 465 S&P 500 companies that have reported Q2 results beat estimates, according to Bloomberg data, and the security software group's performance is part of that wider trend. But the sector stands out for the pace of its re-rating, with the CIBR ETF now trading near $100 after starting the year well below that level.

The competitive dynamics within cybersecurity are also shifting. CrowdStrike's leadership in endpoint security has made it the sector's bellwether, but its CTO's departure raised questions about product direction. Zscaler's zero-trust architecture positions it well for the shift toward identity-centric security, while SentinelOne's AI-powered endpoint detection has gained traction with enterprises looking for alternatives to legacy antivirus solutions.

For investors, the question is whether the re-rating has further to run. Zscaler trades at a significant premium to the broader market, reflecting expectations for continued growth in zero-trust security. Cloudflare, by comparison, trades at a forward P/E of roughly 217x, illustrating the rich valuations across the sector. SentinelOne, meanwhile, is still working toward sustained profitability, with its valuation more dependent on execution than on current earnings.

The sector's forward outlook hinges on continued enterprise spending on security. With AI-driven threats growing in sophistication and frequency, companies are prioritizing security budgets even as they scrutinize other IT spending. That dynamic, combined with the strong earnings backdrop, suggests the re-rating could extend to additional names in the sector. The next test comes with the September earnings cycle, when investors will see whether the demand momentum carries into the second half of the year.

This article is for informational purposes only and does not constitute investment advice.