Startup Nation: The Investment Potential of Israeli Tech Firms

In 1966, a company called Netafim invented the first drip irrigation system. In 1989, M-Systems created the first USB flash drive, while DSP Group developed the answering machine. A flurry of other innovations emerged over the following decades, including Waze driving technology, which was acquired by Google in 2013.

These diverse innovations changed people’s lives in a myriad of ways. And they all share something in common: They were developed in Israel.

Think of tech centers, and Silicon Valley comes to mind, as well as its New York counterpart, “Silicon Alley.” But Israel has been perhaps as important for its global technology innovations.

This is no accident. Often referred to as the “Startup Nation,” Israel has cultivated an innovative and entrepreneurial spirit to promote economic development and growth. As a nation without many natural resources, Israel has had to rely on a scrappiness and the art of survival in a contested area of the Middle East. This has inspired a culture of innovation that continues to this day.  Furthermore, they have world class tech universities providing a stream of talent. Israel also spends 6% of gross domestic product (GDP) on research and development (R&D). ¹ Notably, Israel spends more on R&D as a percentage of GDP than any other nation. Israel also has the highest number of startups per capita globally. ²

From an investment standpoint then, Israel, despite the geopolitical turmoil in the region, has appeal. For investors – and financial advisors seeking growth opportunities for their clients – investing in Israeli tech offers the ability to access companies developing the latest biotech, software, hardware, clean energy and other innovations, robust technology leadership, economic stability, and a dynamic investment landscape.

Israel’s reputation as a hub of innovation has caused many leading public companies to open operational and R&D and innovation centers in Israel to tap into the talent and expertise in the Israeli market.

Take a look at the visual to see highlights of various successful start-up innovations that came from Israeli-tech dating all the way back to 1966 and continuing into the present.

For investors considering a focus on Israeli technology, there are three things to keep in mind:

There are a range of tech subsectors. Obviously, tech investing is an umbrella term for a broad range of innovations and activities, each subject to its own risks and opportunities. It is important to note that among Israel’s strength as a focus for tech investing is the range of technologies being developed there. For example, one of Israel's most prominent sectors is cybersecurity with many Israeli companies at the forefront of developing cutting-edge security solutions that protect sensitive data and combat cyber threats, such as Check Point Software Technologies. ³ Software, telecommunications, clean energy and semiconductors are among the other subsectors based in Israel.

Israeli tech sees significant M&A activity. Just as there is a long tradition of Israeli tech companies innovating, there is a long history of those companies being acquired by other firms. This is a significant positive for investors, as there is often a major boost in the stock price leading to the acquisition. For example, recently WalkMe, which went public in 2021, was acquired by SAP for approximately a 45% premium. ⁴ Intel acquired autonomous driving firm Mobile Eye, and Nvidia acquired networking architecture company Mellanox, both at a hefty premium. ⁵ This M&A activity presents opportunities for acquisition multiples at a significant premium to the pre-acquisition price.

A few high-profile examples include:

See chart below for more information on major tech acquisitions in Israel.

Israeli Tech: Prime Landscape for M&A Activity

In short, larger firms are on the lookout for potential acquisition targets in Israel, which can benefit equity investors.

Potential opportunity relative to US tech. The last few years have seen an enormous rally in US tech stocks, concentrated in relatively few names. In contrast, valuations are still considered attractive in Israeli tech firms, particularly following the recent conflict. Given the long-term attractiveness of these innovations this may represent a significant opportunity. Moreover, there are potential diversification benefits within an overall tech position as many Israeli tech companies are small and mid-cap companies and have no exposure in the Nasdaq.

Investors have a number of ways to invest in the overall Israeli equity markets, which includes sectors outside of tech. However, a focus on tech may be attractive as a standalone position to supplement a tech portfolio. This is especially relevant given many investors get their tech exposure exclusively from the Nasdaq 100, which given its large cap nature, doesn’t include small and mid-cap names.⁶

Obviously, investing in Israeli tech is not without risks, especially given the tensions and conflicts in the region. However, Israel's role as a center of innovation still makes it a compelling destination for investors to consider. The startup nation shows no signs of slowing down.

Related ETF

• ITEQ: Amplify BlueStar Israel Technology ETF

¹ R&D as a percentage of GDP by country 2022 | Statista

² Israeli Startup Ecosystem: The Road to Becoming a Scaleup Nation (therecursive.com)

³ As of 07/05/24, Check Point Software Technologies Ltd is an 8.00% holding in ITEQ.

⁴ SAP to acquire digital adoption platform WalkMe for $1.5B, TechCrunch I As of 07/05/24, Walk Me Ltd. is a 0.50% holding in ITEQ.

⁵ As of 07/05/24 Mobileye Global Inc. is1.16% holding in ITEQ.

⁶ The Nasdaq-100 is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index.

Investing in non-U.S. securities carries risks like currency fluctuations, political/economic instability, varying regulatory requirements, and less public information compared to U.S. entities. Investment in securities of Israeli companies involves additional risks due to regional tensions potentially affecting the economy and share values. Volatility from ongoing or future conflicts or the threat of future hostilities may cause significant volatility in the share prices of companies based in or having significant operations in Israel.

Technology sector investments are subject to fierce competition, potential obsolescence, and fast-paced changes including limited product lines and challenges in maintaining growth, personnel, and cost competitiveness.