Is the "AI Scare Trade" Overblown for Cybersecurity

Key Takeaways

• Cybersecurity stocks, including Okta and JFrog, have been significantly impacted by a broader "AI scare trade" in software, despite robust underlying demand for security solutions.
• Okta's 9.18% drop and JFrog's dramatic 24.94% plunge on February 20, 2026, reflect acute market anxiety over AI's disruptive potential to established software business models.
• Despite short-term volatility and valuation concerns, the critical and non-discretionary nature of cybersecurity in an increasingly AI-driven threat landscape suggests a potential long-term buying opportunity for discerning investors.

Is the "AI Scare Trade" Overblown for Cybersecurity?

The technology sector has been a rollercoaster lately, and February 2026 has proven particularly volatile for software stocks. A narrative dubbed the "AI scare trade" has taken hold, with investors indiscriminately selling off companies perceived to be vulnerable to AI-driven disruption or efficiency gains. This broad-based fear has seen the B2B software universe decline by more than 10% in January alone, even as broader indices like the S&P 500 and Nasdaq showed more resilience. The core anxiety stems from the rapid adoption of new "agentic AI" tools, which some believe could fundamentally dismantle traditional Software-as-a-Service (SaaS) business models by automating tasks previously performed by human users or specialized software.

However, cybersecurity, a critical sub-segment of software, presents a nuanced case. While the First Trust Nasdaq Cybersecurity ETF (CIBR) is down roughly 9% over the past month and the WisdomTree Cybersecurity Fund (WCBR) has slipped about 5%, industry analysts like Wedbush's Dan Ives argue that AI will actually be a "major tailwind" for the sector. The logic is compelling: as AI accelerates the sophistication and speed of cyberattacks, the demand for advanced, AI-driven defense mechanisms becomes not just important, but mission-critical. Companies simply cannot afford to cut corners on security, making it a resilient budget item even amidst broader IT spending scrutiny.

This dynamic creates a fascinating tension. On one hand, the market is reacting to the perceived threat of AI to software business models, leading to widespread selling. On the other, the very same AI advancements are simultaneously expanding the "attack surface" for enterprises, forcing them to invest more heavily in cybersecurity. This suggests that while general enterprise software budgets might be under pressure, security remains a top priority. The question for investors, then, is whether the current sell-off in cybersecurity stocks like Okta and JFrog is an overreaction, or if the underlying concerns about AI disruption are genuinely justified for these specific players.

Why Did Okta Plunge on "Claude Code Security" News?

Okta (NASDAQ: OKTA), a leader in identity and access management (IAM), experienced a significant drop of 9.18% on February 20, 2026, closing at $74.29. This sharp decline was directly attributed to the unveiling of "Claude Code Security" by Anthropic, a new AI tool designed to autonomously scan codebases for vulnerabilities and suggest targeted software patches. The market's immediate reaction was to interpret this as a potential threat to established cybersecurity solutions, particularly those involved in identifying and mitigating software risks.

Okta's business model revolves around securing digital identities and access, ensuring that only authorized users and devices can connect to critical applications and data. While "Claude Code Security" focuses on code-level vulnerabilities, the broader market fear is that advanced AI tools could eventually automate or significantly reduce the need for certain human-driven security functions, potentially impacting the demand for specialized security software. This "AI Panic" led to indiscriminate selling across the sector, even for companies like Okta whose core offerings are not directly replicated by a code-scanning AI.

Despite the recent dip, Okta's fundamentals show a company with a strong market position. Its TTM revenue growth stands at a healthy 15.3%, with impressive net income growth of 107.9% and EPS growth of 102.8%. The company boasts a solid gross margin of 77.1% and a positive operating margin of 3.9%, indicating efficient operations. With a market capitalization of $12.59 billion, Okta is a significant player in the identity space. Wall Street analysts maintain a "Buy" consensus rating, with a median price target of $115.00, implying a substantial 54.8% upside from its current price. This suggests that while the market reacted sharply to the AI news, analysts see long-term value in Okta's mission-critical identity solutions.

What Drove JFrog's Dramatic Decline?

JFrog (NASDAQ: FROG), a prominent player in the DevSecOps and software supply chain management space, suffered an even more dramatic decline than Okta, plummeting 24.94% on February 20, 2026, to close at $37.75. Like Okta, JFrog's nosedive was largely triggered by the same "AI scare trade" and the specific news of Anthropic's "Claude Code Security" tool. The market perceived this AI innovation as a direct threat to companies that facilitate secure, automated software releases and manage complex supply chains, fearing that AI could streamline or even replace some of these functions.

The anxiety around JFrog is particularly acute because its platform is deeply embedded in the software development lifecycle, an area where AI-driven automation promises significant efficiency gains. Investors are grappling with the potential for "agentic AI" to fundamentally alter how software is built, tested, and deployed, leading to concerns about the long-term viability of current business models for DevSecOps providers. This fear-driven sell-off occurred despite JFrog recently beating its Q4 earnings estimates, reporting $0.22 EPS against a $0.19 consensus and revenue of $145.31 million against $138.09 million expectations.

Looking at JFrog's TTM financials, the company reported revenue growth of 24.1% for FY2025 YoY, demonstrating strong top-line expansion. However, it still operates at a negative net margin of -13.5% and a negative operating margin of -17.7%, resulting in a negative TTM EPS of -$0.60. While the company is free cash flow positive with a TTM FCF of $1.20 per share and 32.0% FCF growth, its valuation metrics like P/S of 8.49 and P/FCF of 31.74 remain elevated for a company not yet consistently profitable. Despite these concerns, Wall Street analysts have a "Buy" consensus rating for FROG, with a median price target of $70.00, suggesting a massive 85.4% upside potential, indicating a belief in its long-term growth trajectory and the eventual path to profitability.

The Bull Case: Why Cybersecurity is Different

The "AI scare trade" might be hitting the broader software sector hard, but the bull case for cybersecurity, even for companies like Okta and JFrog, rests on a fundamental distinction: security is not a discretionary expense. As AI-driven threats become more sophisticated and frequent, cybersecurity transforms from a "nice-to-have" to an absolute necessity. Wedbush analyst Dan Ives highlights this, arguing that AI will be a "major tailwind" for the sector as the protection of use cases, data, and endpoints expands markedly. This isn't just about new threats; it's about the very foundation of digital trust.

Consider the expanding attack surface. The proliferation of APIs, cloud workloads, and IoT devices, all increasingly managed or enhanced by AI, creates exponentially more entry points for malicious actors. This forces companies to invest more, not less, in robust security solutions. Vendors are reportedly hiking sales targets by as much as 30% this year to keep up with strengthening demand, a clear indicator that security budgets are resilient. The "platformization" of digital trust services, with Public Key Infrastructure (PKI) at its core, is accelerating, emphasizing comprehensive, integrated security rather than fragmented point solutions.

Furthermore, the cybersecurity market is entering a more structural phase. Network breaches are no longer isolated technical incidents; they carry severe regulatory, financial, and reputational consequences. This shift from reactive defense to proactive resilience, coupled with a global shortage of skilled cybersecurity professionals, drives demand for automated, AI-powered solutions that enhance accuracy and speed up threat mitigation. Companies like Okta, with its identity management, and JFrog, with its DevSecOps focus, are integral to this evolving security architecture, making their services sticky and indispensable even in an AI-transformed IT landscape.

The Bear Case & Valuation Concerns: Is the Dip Justified?

While the long-term tailwinds for cybersecurity are compelling, the bear case for Okta and JFrog isn't without merit, primarily revolving around slowing revenue growth and lofty valuations. The "AI tax" on corporate budgets is a real concern; even if cybersecurity remains a priority, the finite pool of IT spending could see other areas cannibalized, potentially impacting the growth trajectory of some security firms. The market's current skepticism reflects a reassessment of "price-to-perfection" multiples, as software is no longer universally perceived as a low-risk, structurally high-growth asset class amidst accelerating AI disruption and macro uncertainty.

For JFrog, despite strong revenue growth of 24.1% and positive free cash flow, its negative net margin of -13.5% and operating margin of -17.7% raise questions about its path to sustainable profitability. Its P/S ratio of 8.49 and P/FCF of 31.74 are still high for a company not consistently generating net income. The recent insider selling of approximately 407,814 shares, valued at around $25 million, over the last 90 days also adds a layer of caution, suggesting that some within the company may see current valuations as stretched.

Okta, while profitable with a 6.9% net margin, trades at a P/E of 66.82 and a P/S of 4.43. While these are more reasonable than some high-growth tech peers, they still reflect significant growth expectations. The market's reaction to "Claude Code Security" highlights a broader fear that AI could disrupt even established players by automating security functions or enabling new, more efficient competitors. This uncertainty, combined with a general market trend of valuation compression in B2B software (EV/Sales falling from 5.6x to 5.0x in January), means investors are scrutinizing growth durability and capital intensity more closely than ever before. The dip, therefore, is a reflection of both macro sentiment and company-specific valuation concerns.

Investor Implications: Navigating the Opportunity

For investors eyeing Okta and JFrog after their recent declines, the current market environment presents a classic dilemma: is this a falling knife or a generational buying opportunity? The consensus among Wall Street analysts remains largely bullish for both companies, with Okta holding a "Buy" rating from 51 analysts and JFrog a "Buy" from 21 analysts. Their median price targets of $115.00 for Okta and $70.00 for JFrog suggest significant upside potential, implying that the recent sell-off is an overreaction to the broader "AI scare trade."

However, investors should approach with caution and conduct thorough due diligence. While the long-term demand for cybersecurity is undeniable, the short-term volatility driven by AI disruption fears could persist. For Okta, its leadership in identity management is critical, especially as synthetic fraud and deep fakes proliferate, making identity authenticity a growing crisis. For JFrog, its role in securing the software supply chain becomes even more vital as AI accelerates development, but its path to consistent profitability needs close monitoring.

The key is to differentiate between genuine AI-driven disruption and market overreaction. Cybersecurity is a non-discretionary spend, and the increasing complexity of threats, fueled by AI, will likely reinforce budget resilience. Investors with a long-term horizon and a high tolerance for volatility might find these dips attractive entry points into companies operating in a structurally growing and essential market. However, be prepared for continued price swings as the market grapples with the transformative, and sometimes unsettling, implications of artificial intelligence.

The current market sentiment, while challenging, underscores the enduring importance of robust cybersecurity. For those willing to weather the "AI scare trade," Okta and JFrog may offer compelling long-term value, but careful selection and a clear understanding of their evolving roles in the AI-driven security landscape are paramount.

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