Morningstar - Q1 2022 - 22

Dispatches
Changing security vendors today is more
challenging than it was a decade ago because of
the integration of features covering various
security aspects. These three leading cybersecurity
companies have built out security platforms
containing their core firewall security products
plus tangential solutions. The buying pattern
of cybersecurity has shifted away from point-based
security solutions, which has led to security
toolset sprawl within organizations, and toward
fewer key vendors that cover particular pieces
of security. Based on industry reports, Morningstar
analysts estimate that enterprises maintain
60 to 80 different security solutions but want to
condense that to 15 to 20 key vendors.
Analysts think Check Point, Fortinet, and Palo
Alto have leading platforms that will keep
customers locked into their ecosystems for the
long haul.
The positive moat trend ratings for Fortinet and
Palo Alto come from their larger, stickier
deals being landed with strongly growing customer
bases-and those deals can include various
products per deal. These companies are
also gaining momentum in areas outside their core
network security offerings, such as cloud
security, automating security responses, and
software-defined networking. Morningstar analysts
believe the two positive-trend companies
are making customers more reliant upon their
solutions and further locking clients into
their ecosystems.
With regard to Check Point's stable trend, analysts
believe the company has a large, loyal customer
base that relies on its sticky products, but its
conservative approach to investing in development
and sales and marketing efforts has caused leading
competitors to make inroads into the broader
security landscape. Nonetheless, analysts believe
these three network security vendors will
remain leaders and are essential to daily operations
for organizations.
Mark Cash is a senior equity analyst at Morningstar
Research Services LLC.
4.2
1
2010
2013
Source: PitchBook. Data as of 11/23/2021.
Note: Performance rebased to 1 on 01/01/2010.
2016
2019
11/23/2021
TRENDS
Venture-Backed IPOs Maintain a Long-Term Lead
Over the S&P 500
The IPO market was red-hot for U.S. venturecapital-backed
businesses in 2021, smashing
records for both deal value and number-
$513.1 billion and 221, respectively-through the
end of the third quarter. These public listings
have also come with healthy step-ups for private
valuations, illustrating the strong demand from
institutional investors for growing businesses.
Given this extremely active environment,
PitchBook analysts revisited their VC-backed
IPO index to investigate the IPOs' performance
to see if that success has held up in the
aftermarket.
Investor Return (%)
Total Return (%)
36.1
9.7
-12.0
-4.3
-7.7
VC-backed IPOs significantly underperformed
the S&P 500 since the beginning of 2021.
Most of the decline started around March,
which roughly coincided with the initial period
of rising bond yields and inflation concerns.
Since then, VC-backed IPOs have been
flat relative to the market, maintaining the
performance deficit.
-26.4
Investor returns are based on estimated monthly net asset flows
and total assets as of the beginning and end of each period.
Returns for periods greater than one year are annualized.
1 Year
3 Years
Investor Returns Versus Total Returns for ARK Innovation ETF
Gap
41.3
9.9
IPOs have performed incredibly well against
the broader market, especially in the past few
years. The greatest outperformance for VCbacked
IPOs started around the time the market
began recovering after the onset of the
pandemic, when companies that had recently
listed accrued huge amounts of market-cap value.
Innovative VC-backed software and biotech
businesses, which fared comparably well during
the pandemic, drove much of this growth.
9.8
50%
28.1
25
Outside of the spike in 2020, the outperformance
of the S&P 500 by VC-backed IPOs since
2014 has been relatively consistent, which is an
encouraging sign for venture capital and the
harmony of valuations between the public
and private markets. Clearly, a significant amount
of value creation is happening in the private
markets; however, there is still growth to be
found after the IPO.
-18.3
-31.5
-25
-50
5 Years
Since Inception
(10/30/2014)
Cameron Stanfill, CFA, is a senior analyst, VC lead,
at PitchBook.
Zooming out to the entire period the benchmark
tracks, however, shows that the VC-backed
Alex Warfel is a data analyst at PitchBook.
Long-Term Leader Although it dipped in 2021, the VC-Backed IPO Index has
consistently outperformed the S&P 500 since 2014.
VC-Backed IPO Index
S&P 500
Multiple of Starting Value
16×
11
10.3
6
22
Morningstar Q1 2022
https://www.morningstar.com/authors/2223/mark-cash https://www.morningstar.com/authors/2223/mark-cash
Morningstar - Q1 2022

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