Something surprising happened to tech stocks on Monday. As semiconductor manufacturers sold off, one segment of the artificial intelligence (AI) trade soared instead.
Chip stocks fell after two frontier AI CEOs, Dario Amodei of Anthropic and Sam Altman of OpenAI, published weekend warnings about the pace of AI development and its risks. Normally, that kind of news would drag down the entire AI trade with it. Instead, cybersecurity stocks rocketed higher.
CrowdStrike (CRWD +1.80%) was up nearly 14% on the session. Palo Alto Networks (PANW -0.16%) gained almost 13%. The First Trust Nasdaq Cybersecurity ETF (CIBR +1.36%), the largest ETF in this space, rose 6% on the day compared to a 4% loss for the VanEck Semiconductor ETF (SMH +2.76%).
Is cybersecurity the next big winner in the AI trade?
Image source: Getty Images.
Why AI risk became a cybersecurity trade
The logic is actually pretty straightforward. If AI models are developing faster than the safety measures designed to keep them in check, they become vulnerable to cyberattacks and other security threats. As a result, companies may soon need to spend more to beef up their security measures.
Investors who read that as potentially slowing demand for chips also read it as an increase in demand for cybersecurity. As a result, the two sectors moved in opposite directions.
Furthering the argument that this is an AI development-speed issue, CrowdStrike CEO George Kurtz responded to the slowdown comments, saying he believes developers will continue advancing their technology regardless of what any single CEO says.
If that becomes the broader view and it falls to the cybersecurity industry to help make that development safer, there's a very bullish catalyst in place for the First Trust Nasdaq Cybersecurity ETF.
NASDAQ: CIBR
Key Data Points
What this means for CIBR
This ETF is a fairly concentrated play on the cybersecurity theme. It holds more than 40 stocks, but its top five holdings -- Palo Alto Networks, CrowdStrike, Fortinet (FTNT +0.47%), Cisco Systems (CSCO +2.32%), and Broadcom (AVGO +2.29%) -- account for roughly 39% of the portfolio.
We've seen AI trade leadership move several times over the past few years. It started with the megacap hyperscalers. Then it was the semiconductor names. Then the memory names. The next rotation may be into cybersecurity as the theme slowly shifts from the growth phase to the sustainability phase.
Since the beginning of 2023, the First Trust Nasdaq Cybersecurity ETF has trailed the broader tech sector. So there is some potential catch-up to do if the market starts fading the semiconductor stocks. The fund trades at a forward price-to-earnings ratio of roughly 24. That's not necessarily cheap, but it's not overvalued either.
For investors who want to stay in the AI trade, cybersecurity could be the next way to play it. If AI development starts getting ahead of itself, it could capture the next infrastructure spending boom.
