While the technology sector has enjoyed a blistering run thanks to robust demand for data centers and other innovations tied to artificial intelligence, an ugly side to the narrative exists. Essentially, as productivity increases, so too does the capability for tech to empower harmful applications. However, enterprises like Palo Alto Networks Inc (NASDAQ:PANW) stand at the forefront of digital protection. As threats continue to rise, PANW stock could see greater relevance.
On paper, Palo Alto has enjoyed a solid though not necessarily remarkable performance. Since the start of the year, PANW stock has gained a bit over 16%. This performance is sandwiched between the wider benchmark S&P 500 and the tech-centric Nasdaq Composite, which have gained 14.26% and 19.38%, respectively, during the aforementioned time period.
To be fair, the trailing six-month performance has raised some technical eyebrows. In this period, PANW stock only managed to gain a little over 12%. In contrast, the Nasdaq stormed higher to a 30% jump, making the cybersecurity sector look rather pedestrian. Still, such a conclusion might be premature.
Fundamentally, Palo Alto benefits from a practically permanent upside catalyst. As tech rises, so too does the need for digital protection. Ritholtz Wealth Management's Josh Brown colorfully made this point, stating that cybersecurity represents the one line item that no company can really afford to cut. The argument here is that any potential cost savings can easily be overrun by a single breach.
Such asymmetries basically make going cheap on cybersecurity equivalent to the threat of tail risk. Right now, the average cost of a data breach stands at $4.4 million — and the negative impact is only growing unfavorably. As such, companies can't afford to be lax on cybersecurity.
Nevertheless, every story has a counterpoint. For PANW stock, one of the main criticisms is the overall lack of technical performance. If simply buying one share of the broader equities market can more or less replicate the returns of PANW, excessive capital exposure might not make much sense.
Also, some critics will likely point to valuation concerns. Currently, PANW stock exchanges hands for nearly 131 times trailing-year earnings. At the end of July this year, this multiple was just under 100. To be clear, valuation ratios are not universal truth claims. Nevertheless, they're ratios that investors often use to gauge market decisions.
The Direxion ETFs: With proponents on either side of the sentiment aisle eager to trade Palo Alto stock, financial services provider Direxion introduced two countervailing products earlier this year. For the optimists, the Direxion Daily PANW Bull 2X Shares (NASDAQ:PALU) track 200% of the daily performance of PANW stock. On the other end, the Direxion Daily PANW Bear 1X Shares (NASDAQ:PALD) tracks 100% of the inverse performance of the namesake security.
Primarily, the purpose undergirding both products is the facilitation of convenient speculation. Typically, those interested in leveraged or inverse exposure must engage the options market. Unfortunately, derivatives and other synthetic transactions can be complicated, which may not suit every investor's taste. However, Direxion ETFs are straightforward, debit-based transactions, thereby minimizing the learning curve. Investors also have the knowledge that they're only liable to lose whatever money they put in.
Of course, every investment narrative carries risk, and Direxion ETFs are no different. Mainly, the concern here is that leveraged and inverse funds tend to be more volatile than standard financial products that are tied to broad indices like the Nasdaq Composite. Also, Direxion ETFs are designed for exposure lasting no longer than one trading session; holding for longer than recommended may expose unitholders to positional decay stemming from the daily compounding effect.
The PALU ETF: Since the start of the year, the PALU ETF gained over 25%. In the trailing six months, the bull fund moved up over 13%.
- Presently, PALU finds itself sandwiched between the 20-day exponential moving average at top and the 50 DMA at bottom.
- While the price action has been moving higher, the motion has been choppy. Also, volume levels are conspicuously deflated relative to levels seen in August.
The PALD ETF: From the January opener, the PALD ETF lost nearly 22%. In the past six months, it's been down more than 10%.
- At the moment, PALD has struggled to find a bottom. As such, the $21 level could act as resistance, which may be problematic.
- As with the bull fund, PALD has incurred a noticeable loss of volume since August. However, acquisition volume has started to pick up, which may hint at intent.
Featured image from Shutterstock
