CyberArk (CYBR): A Trade Becomes an Investment Opportunity

Trading and investing are two different things, but every now and again they intersect and what starts out as a trade can become an investment. You can buy something with a specific target in mind based on a technical signal or whatever, but then, when it gets there, decide to hold on for longer. Usually, those decisions are unintentional, prompted by changes in the fundamental outlook for a company or industry, or for the overall economy. Sometimes, though, they are intentional, when you buy a stock based on a technical level with the idea of trimming rather than closing your position when a certain level is reached and running the balance for a long time.

To do that, the setup has to be right in every way. You want something that has been a good trading stock; that has moved around enough to make short-term profit possible but that has also behaved in a fairly predictable manner based on the chart. Then, whatever it is needs to have a solid long-term bull case as an investment. On that basis, CyberArk Software (CYBR) has been catching my attention lately.

For the last four months or so, CYBR has been not just a good trading stocks, but a great one. It has traded in a gradually upward sloping channel that represents a range of over 25% from top to bottom, with many moves from one extreme to the other taking just a couple of days. Since the beginning of August, CYBR has been within a few bucks of the top of the channel three times, and the bottom three times. That is a lot of opportunities to make a lot of money in both directions.

As you can see from the chart above, though, last week the move down breached the previous support when drawn as an upward sloping channel, marked by the blue line. However, in doing so, it still stopped short of the low reached in October, marked by the gold line, and bounced back quickly. That resets the support to that low, 134.29, which just results in a slightly less steep slope to the lower channel line:

Based on that redrawn support, we closed on Wednesday about five bucks, or around 3.5%, above the anticipated low. A stop just below that gives a downside of, say, 4%. If CYBR behaves as it has before though, it will bounce back to approach the top of the channel, to around $165, giving a potential upside of around 17%. That is the kind of risk/reward ratio that has made the stock such a great trading instrument for a few months, but this time, fundamental factors suggest that if we get back to around $165 that will be just the start, and a breakout to the upside is very possible.

CyberArk is a company that makes and sells cybersecurity software, and the potential for that industry is massive. That potential is well-known, resulting in seemingly everybody trying to get in on the act. Even though CyberArk is not small, with a market cap of close to $6 billion, competing with the likes of Microsoft (MSFT) and Alphabet (GOOG, GOOGL), both of which have recently beefed up their cybersecurity divisions, is not easy.

There are early signs that there will be enough growth in the industry next year to allow for growth for established firms like CyberArk despite the involvement of bigger players like MSFT or GOOGL. There have been multiple surveys and reports showing that cybersecurity will be a priority for a large majority of companies next year, so a company like CyberArk can potentially grow revenue, even if their market share takes a hit. What most makes me want to work towards a long-term long position in CYBR, though, is that 2023 doesn’t even have to be a great year for the stock to do well. There is a lot of money around right now that is looking for a return, so the widespread belief that cybersecurity is heading towards a boom will create buyers of the stock almost whatever the conditions are.

The idea here is to buy CYBR at current levels, with a stop just below the support and a view to selling half the initial position at 157.50. That would leave me with a long position at an average of around 117.50, a level not seen since June. That would give a lot of cushion to run a long-term position in a volatile stock and the CYBR trade will become an investment.

 * In addition to contributing here, Martin Tillier works as Head of Research at the crypto platform SmartFI.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.