Why CrowdStrike and cybersecurity stocks got crunched in Thursday's rout

By Christine Ji

Highflying cybersecurity names take a beating from broader market concerns as well as 'Black October' infrastructure hacks and news about AI disruptors

CrowdStrike's stock has surged more than 90% this year, which could make it an easy target for investors looking to lock in gains.

Cybersecurity names were once seen as a resilient corner of the software sector, positioned to benefit from the artificial-intelligence boom instead of being disrupted.

But as a widespread selloff gripped tech stocks and broader markets on Thursday, cybersecurity companies were feeling the heat as well. Shares of CrowdStrike (CRWD) and Okta (OKTA) fell around 10%, while Cloudflare (NET) dropped 8%. Palo Alto Networks (PANW) fell 9.6%. These declines were significantly steeper than the 4.4% loss posted by the iShares Expanded Tech-Software Sector ETF IGV.

"Across most technology baskets, nothing is really escaping today," said Max Becker, global multi-asset principal at Marsh. While Wednesday's selloff was limited to semiconductor names, large swaths of tech sold off indiscriminately Thursday as markets digested the impact of the midterm elections.

"The ex-AI component is also negative today," Becker added, referring to companies not directly levered to AI spending. "That was up yesterday."

Apple's stock (AAPL) is a perfect example: Shares hit a new all-time high on Wednesday as investors treated them as a defensive play against rampant AI spending, but they fell 1.5% on Thursday.

CrowdStrike and other cybersecurity names were flat on Wednesday before their slide Thursday.

Adding to the pressure on cybersecurity names is that fact that many are richly valued. Shares of CrowdStrike are up 93% since the beginning of the year, and Palo Alto Networks' stock is up 77% year to date, supported by the bull thesis that demand for cybersecurity products will explode as AI agents exploit vulnerabilities in digital infrastructure. The cybersecurity selloff may be exacerbated by investors looking to trim some of their highflying holdings and take gains off the table, Becker added.

"There's not a lot of discrimination happening at this point," Michael Sansoterra, chief investment officer of Silvant Capital Management, said of the tech selloff.

While both Becker and Sansoterra believe the weakness in cybersecurity is the byproduct of overall market conditions, the sector is also going through an AI upheaval.

A wave of major AI-enabled hacking campaigns and security incidents have occurred in the past few weeks, leading industry experts to coin the term "Black October." Hackers remotely seized internet-connected freezers in European supermarkets and blood banks to crank up temperatures. Engineers also rushed out emergency patches for PHP, a scripting language that powers 70% of global websites, after discovering critical vulnerabilities.

These attacks are calling into question the capabilities of current cybersecurity systems. There's also the threat of AI-native applications taking market share. On Wednesday, OpenAI announced that its reasoning models autonomously uncovered and validated nearly 1,000 security flaws in the core Linux operating system. OpenAI estimated the automated audit cost roughly $1,280 per working exploit, significantly cheaper than the $18.9 million to $66.3 million that OpenAI estimated traditional methods would have cost.

"There's always reactionary behavior when powerful potential disruptors are in the market," Sansoterra said. "The fear around AI is going to pop in time to time," but cybersecurity companies are also using AI to their advantage, he added.

CrowdStrike, in particular, announced two acquisitions earlier this week to bolster its agentic AI capabilities, which will help the company differentiate its portfolio, Jefferies analyst Joseph Gallo wrote in a Monday note.

AI labs can come up with their own cybersecurity offerings and compete with existing players, but writing off cybersecurity stocks all at once is probably a "knee-jerk reaction," Sansoterra said.

-Christine Ji

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-05-26 1612ET