My post here is a spinoff from Wendy’s OP “Impact of Hamas invasion of Israel on U.S. markets" that addresses the following quote from a WSJ article “Why the Israel-Hamas War Matters for Investors”:
…When it comes to the bottom line, even disaster for millions of people doesn’t much matter, and moves in both stocks and Treasurys were smaller than after Friday’s jobs report…
What won’t happen is a repeat of the Arab oil embargo that followed the last invasion of Israel half a century ago, as Arab states are now much more friendly to Israel. …
For investors, insuring against a true Iran-Israel conflict is easier than usual. The things to buy — oil stocks, defense stocks and Treasurys — were fairly attractive anyway, as the tight oil market delivered high profits and bond yields hadn’t been so high since 2007…
There is a lot more uncertainty that now requires more vigilance for investors like me who currently hold positions in Israel-based global companies listed on U.S. stock exchanges, e.g., mine that include the following:
• MNDY, monday.com Ltd. (NASDQ Global Select), Market cap $7.15 B
Technology, Software - Application
monday.com Ltd., together with its subsidiaries, develops software applications in the United States, Europe, the Middle East, Africa, and internationally. It provides Work OS, a cloud-based visual work operating system that consists of modular building blocks used and assembled to create software applications and work management tools. The company also offers product solutions for work management, sales CRM, and software development verticals; and business development, presale, and customer success services. It serves organizations, educational or government institution, and distinct business unit of an organization. The company was formerly known as DaPulse Labs Ltd. and changed its name to monday.com Ltd. in December 2017. monday.com Ltd. was incorporated in 2012 and is headquartered in Tel Aviv, Israel.
• GLBE, Global-E Online Ltd. (NASDQ Global Select), Market cap $5.85 B
Consumer Cyclical, Internet Retail
Global-E Online Ltd., together with its subsidiaries, provides a platform to enable and accelerate direct-to-consumer cross-border e-commerce in Israel, the United Kingdom, the United States, and internationally. Its platform enables international shoppers to buy online and merchants to sell from, and to, worldwide. The company was incorporated in 2013 and is headquartered in Petah Tikva, Israel.
Another investment of mine in the cybersecurity arena, Palo Alto Networks (PANW), market cap $79.99 B, based in Santa Clara, CA, has a large presence and operation in Israel. Its founder, board member and chief technology officer Nir Zuk grew up in Israel and was one of the earliest employees at Check Point Software Technologies Ltd. (CHKP), which today is one of Israel’s largest companies and the second largest of all Israeli companies listed on U.S. stock exchanges. Due to disagreements with CHKP CEO Gil Shwed, in 1999 Zuk departed the company and in 2005, founded Palo Alto Networks where he became the principal developer of the first stateful inspection firewall and the first intrusion prevention system. Today, Palo Alto Networks, Inc. provides cybersecurity solutions worldwide. The company offers firewall appliances and software; and Panorama, a security management solution for the global control of network security platform as a virtual or a physical appliance. It also provides subscription services covering the areas of threat prevention, malware and persistent threat, URL filtering, laptop and mobile device protection, DNS security, Internet of Things security, SaaS security API, and SaaS security inline, as well as threat intelligence, and data loss prevention. In addition, the company offers cloud security, secure access, security operations, and threat intelligence and security consulting; professional services, including architecture design and planning, implementation, configuration, and firewall migration; education services, such as certifications, as well as online and in-classroom training; and support services. It sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries, including education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. After working and living two decades in the U.S., Zuk willingly returned to Israel during the Covid-19 pandemic.
In an exclusive interview with Calcalist on 9/14/2023, Nir Zuk made the following comments:
Palo Alto Networks Founder: "Only a few dominant players will survive the cyber consolidation”
“In the end, every computing infrastructure market that matures undergoes significant consolidation, with only a few key players remaining” as Palo Alto continues to expand its Israeli offices, that are already responsible for annual revenue of around $1.5 billion.
According to Zuk, Palo Alto Networks plans to expand its second largest center, located in Israel, where it manages all aspects of its two main product lines, I.e., Prisma Cloud for cloud security and Cortex, the solution for automated cyber incident management. The revenues generated by Palo Alto Networks’ Israeli offices are rapidly approaching $1.5 billion and continue to grow. The Cortex division, led by Gonen Fink, reported revenues of $1 billion in the last 12 months, and the annual revenue rate (ARR) of the Prisma Cloud product line has reached half a billion dollars. Palo Alto Networks expects revenues of $11 billion next year. The company’s Israeli presence has also doubled since then, employing nearly a thousand workers in its Tel Aviv offices. In the coming year, the company plans to recruit 250 more employees for its Israeli center, exceeding the rate of hiring in its U.S. and India offices, where Palo Alto also has development centers.
The interviewer commented: Let’s discuss the cybersecurity field, which has been quite active lately. Israel is synonymous with cybersecurity, boasting hundreds of startups and numerous large companies merging with each other, such as Check Point’s acquisition of Perimeter 81 for half a billion dollars and the potential merger between Wiz and SentinelOne, which could create a new market giant with a valuation exceeding $10 billion and revenues of over $1 billion.
Zuk’s eye opening response: Israel should explore new opportunities beyond cybersecurity because this market is maturing. Cybersecurity is undergoing consolidation as larger companies expand and smaller ones find it increasingly challenging. We are witnessing discussions between Wiz and SentinelOne, and more such consolidations will likely occur. The realization is that focusing exclusively on a narrow niche within cybersecurity is unsustainable. In the end, every computing infrastructure market that matures undergoes significant consolidation, with only a few key players remaining.
Q: Who are these dominant players likely to survive?
Zuk: Palo Alto, which has consistently advocated for consolidation over the years. Microsoft is another key player, and additional cybersecurity companies are venturing into various sectors but avoiding direct competition with us and Microsoft. The landscape is evolving.
Q: What will happen to those companies that remain in the middle and don’t participate in mergers?
Zuk: Reaching billion-dollar sales figures will be exceedingly difficult for them. Currently, there are fewer than ten cybersecurity companies with revenues of this magnitude: Palo Alto, Microsoft, Cisco, Fortinet, Zscaler, Check Point, and CrowdStrike. Neither we nor Microsoft achieved these revenues through organic growth but rather through smart acquisitions. We always prefer to acquire rather than develop on our own.
Q: What about the numerous cybersecurity startups in Israel?
Zuk: Some will not succeed, and some will be acquired. Cybersecurity companies face a complex situation because recent recruitment was based on extremely high valuation levels, leading to challenges now requiring compromises on valuations. There’s also the issue that there are no longer as many buyers in the cybersecurity market. I anticipate there will be many closures. Symantec, Cisco, and McAfee are no longer making purchases, and those that remain are primarily Microsoft, Fortinet, CrowdStrike, and us, with Check Point playing a smaller role. It becomes challenging to establish startups when there are only 5-6 buyers in the market. It’s preferable to invest human capital in other fields.
Q: What could potentially replace cybersecurity in Israel as a distinctive advantage?
Zuk: Fintech has been highly successful in Israel. There’s still ample room for innovation and transformation in the banking industry, which still relies on systems that are 40-50 years old. Another area where Israel can excel is AI. We haven’t missed the AI train; it’s just starting to gain momentum. While ChatGPT and Bard are fascinating, they aren’t necessarily tailored to specific sectors. We discovered this when attempting to use them in the legal industry, which proved to be a complete failure. The key is to build companies that use AI to compete in traditional fields.
Q: What sets us apart in this realm? It seems that the United States and China have already taken the lead.
Zuk: Everything we’ve achieved so far in Israeli high-tech has been the best. There’s no gap with the world. The only gap exists in the field of large language models (LLM), where we may have been a bit late regarding investment and computational capacity. Nevertheless, there’s still plenty of room for activity. Private funding would be preferable, but if the government could establish a computing center, that would be fantastic. The Nvidia supercomputer isn’t a charitable endeavor; they’ll charge hefty fees, making AI quite expensive at the moment. We’ve been doing AI in Israel for over a decade. Half of the companies we’ve acquired here are essentially AI companies, and we also have AI labs. A significant percentage of Palo Alto’s technical teams focus on AI.
Q: Many of your colleagues in the local high-tech sector are quite pessimistic, believing that the damage inflicted over the past year on the economy in general, and high-tech in particular, is irreversible and will take years to repair.
Zuk: The state of Israeli high-tech is not good. Raising capital is extremely difficult due to the current situation, I travel abroad with companies I’m involved in to raise capital, and a significant portion of those meetings focus on questions about the turmoil in Israel. Investors often don’t delve into the details, and not everyone even cares which side will emerge victorious. They invest in Saudi Arabia, China, and India as well, but what they all seek is certainty, and without it, they are hesitant to invest here.. [Note: my emphasis in bold]
Q: How do you address investors’ selectivity and reluctance to invest in Israel? What’s your response?
Zuk: I explain to them that this is a temporary situation. The foundations of the State of Israel and Israeli high-tech have not changed and will not change. Above all, I demonstrate that I’m investing my own money here, and they should join me. In the past year alone, I’ve personally invested NIS 100 million (approximately $26 million) in Israeli companies. These investments are not in cyber companies because I avoid investing directly in that sector to prevent conflicts of interest. Instead, I invest in fintech companies, medical device companies, and local businesses. My optimism arises from these investments.
Q: What is the source of this optimism, both yours and theirs?
Zuk: In the end, there will be a solution, and that solution is certainty, which will come once the threat of regime change is no longer on the table. Investors are searching for certainty. [Note: my emphasis in bold}
I highly recommend reading the entirety of the Zuk interview which occurred a few weeks before the 10/7/2023 Hamas attack on Israel that, in turn, fuels a lot more uncertainty and a highly perilous state of affairs.
For those interested, here’s the 52-week performance of my investments in PANW, MNDY and GLBE
and the year-to-date performance.
For now, regarding my investments in Israel-based companies, I’m in a vigilant wait and see mode.
As always, conduct your own due diligence and decision-making.