A leader in innovation across a wide range of sectors, Israel invests heavily in scientific research and education. Israel boasts one of the world’s highest-educated workforces. There are 140 scientists and technicians per 10,000 employees as compared to the US’s 85 per 10,000 employees. Known as a “Nation of Start-Ups”, Israel is third in terms of the number of the companies listed on the NASDAQ, after the USA and China. Last year, Israel’s startups raised record amounts of funding and produced 19 IPOs, despite the COVID-19 pandemic. The most success has been achieved in the cybersecurity segment that is expected to continue to grow. State agencies fund incubators for early-stage technology start-ups and the government actively encourages foreign investments. A special agency called “Invest in Israel” was established within the Ministry of Economy and Industry with the aim of promoting Israeli’s innovation ecosystem. The agency connects the private and public sectors to boost investments in the country.
As of June, Israel’s innovation technology sector achieved a new capital funding record with a total of $10.5 billion raised since the beginning of 2021. Investments in Israeli tech companies have surged by 137% for the first 5 months of this year as compared to the same period in 2020. This is more than the world’s average of 89%. Europe saw a 123% increase over the same period, while the USA recorded an increase of 91%. Cybersecurity, fintech, and enterprise solutions companies are the top three sectors that pulled 60% of all investments. All these sectors are all software, strongly oriented on B2B services, and have seen a considerable rise in demand for their solutions recently.
“The record funding in 2021 indicates that the growth in 2020 was not a short-term Covid-related boost but reflects top investors' increasing trust in the Israeli innovation ecosystem. The significant increase in median deal size reflects a maturing ecosystem that is able to maintain its competitive edge as a global hub of technological innovation and offering problem-solving solutions,” said Uri Gabai, the CEO of recently launched Research and Policy Institute that focuses on advancing Israel’s high-tech and innovation ecosystem.
According to an OECD report published on December 1, the Israeli economy rebounded strongly this year, surpassing forecasts. “Economic activity rebounded strongly in 2021 and GDP is projected to grow robustly by 6.3% in 2021, 4.9% in 2022, and 4% in 2023. The progressing booster vaccination campaign, a gradually recovering labor market, and fading uncertainty will support domestic demand. Strong growth of high-tech services exports will continue,” the report says.
In the first half of 2021, Israeli exports rose 24% to $67.6 billion as compared to the same period last year, according to the data provided by the Economy and Industry Ministry. The “unprecedented” export growth of 38% was achieved in the second quarter, and for the full year, Israeli exports are expected to rise 20% year on year. Export of services increased by 30%, while export of goods was up by 18%. It was for the first time ever that Israeli export of services surpassed goods' exports, making up for more than 51% of the country's total exports. This was mainly due to the rise in hi-tech service exports. Software, computing services, and scientific R&D services increased by 29% and 48%, respectively. As for the export of goods, diamonds, pearls, and other precious metals constitute 33% of the country's total exports, followed by electrical machinery and appliances (22%) and chemical products (11%). In the first half of this year, exports of diamonds surged 111%, reversing a trend in recent years.
Last year, the average inflation rate in Israel was approximately -0.59% as compared to 2019. The shekel has been supported by the strong fundamentals of the country's economy. In particular, its exports have exceeded imports, largely thanks to the Israeli strong high-tech industry that has attracted large amounts of foreign investment. “The shekel has been strengthening for 10 years and this long-term trend is a reflection of the fact that the Israeli economy is doing well and there are lots of funds coming in,” a former Bank of Israel’s Deputy Governor Nadine Baudot-Trajtenberg told The Times of Israel.
Israel’s Stock Market
Over the past 20 years, the total market value of Israeli publicly traded stocks has quadrupled from $65 billion to $238 billion. In 2020, Israeli equities rose 28.41%, outperforming developed markets indices such as MSCI EAFE and S&P 500 by 20.1% and 10.0%, respectively. According to The BlueStar Indexes, Israeli equities were the second-best performing developed market. “Israeli technology stocks had a breakout year in 2020 with a gain of 62.38%, topped off by a final surge of 12.61% in December. Israeli technology stocks outperformed most other major technology benchmarks including the Dow Jones US Tech Index, S&P Global 1200 Info. Tech. Index, MSCI EM Tech Index, and Nasdaq-100 Index by 15.1%, 18.4%, 2.3%, and 13.5%, respectively,” the report says. This primarily concerns AI, big data, and work-from-home software stocks as well as clean energy and biotech stocks.
The fastest growth was exhibited by Fiverr (NYSE:FVRR) that operates an online marketplace (+730%), Solaredge (SEDG) that sells solar inverters (+235%), Kornit Digital (KRNT) that offers digital printing systems (+160%), BATM Advanced Communications (BVC.TA) that produces data and telecommunications products (+157%), the software company Varonis Systems, Inc. (VRNS) (+110%), the oncology company Novocure (NVCR): (+105%), and Wix.com (WIX) that runs a cloud-based platform allowing users to create websites (+104%). The stocks that performed poorly last year include biopharmaceutical and drug development companies Urogen Pharma (-46%), Galmed Pharma (-36%), Intec Pharma (-32%), and Beyond Air (-30%), and the security policy company Tufin Software (-29%).
It is noteworthy that there is a divergence of two groups of stocks based on revenue source. Israeli stocks with predominantly global sources of revenue were mainly among outperformers while stocks with predominantly domestic sources of revenue underperformed last year. Technology, green energy, and biotech stocks fared well after the initial negative impact of the COVID-19 pandemic, which was not the case for traditional sectors like real estate and financials.
Another peculiarity of the Israeli market is the growing number of unicorns or companies worth at least $1 billion. The new lifestyle and working conditions caused by the pandemic triggered record investments all over the world, boosting the creation of tech unicorns. Tech unicorns established in Israel account for approximately 8% of this phenomenon, given that the population of Israel represents only 0.11% of the world’s total population. While 20 years ago Israeli startups tended to receive large-scale investments from abroad and move to the USA after becoming successful, now, it is different. The bulk of Israeli unicorns are headquartered and managed from Israel. As of October, there are 74 Israel-founded unicorns with a total value of $201 billion, of which 31 are located in Israel.
Experts believe that the face of Israel’s future economy will be absolutely different from what it used to be thanks to a “critical mass” of unicorns that are thriving in the country. “What we have seen since October 2020, when the surge in valuations of Israeli tech firms started, will lead to a seismic change of Israel’s economy in the coming 10 to 20 years,” said Sagi Dagan from the Israel Innovation Authority.
Many of the highest-valued Israeli companies are private. As for publicly-listed tech companies, the Tel Aviv Stock Exchange (TASE) is increasingly becoming their popular choice due to its highly liquid market and stability. A greater number of Israeli fintech firms are opting to list on the TASE rather than other exchanges, Fintech Magazine reports. For example, the fintech company Nayax Ltd. (NYAX.TA) that offers cashless payment solutions was the largest tech IPO in Israel this year with a raise of $142 million. In the third quarter of 2021, the company saw a 40% year-over-year surge in revenue, up to $31 million.
And yet, many Israeli companies prefer to go public outside the country because, for years, the Tel Aviv Stock Exchange was controlled by the local banks, lacked incentives and sufficient regulations, writes Forbes contributor Carrie Rubinstein. One of the most pressing problems is that the exponential growth of the Israeli tech industry has not been reflected in the national stock market. But lately, the Chair of the Israel Securities Authority Anat Guetta has been trying to transform the Israeli capital market. She has focused on promoting financial innovation, enhancing the regulatory environment, and strengthening the link between the national hi-tech industry and the capital market. Guetta has launched a number of initiatives, such as the establishment of the Fintech Innovation Hub that provides regulatory assistance to technology companies.
“There were several initiatives that we have promoted together with our partners. We approved the possibility to list a new financial instrument, R&D partnerships. These are marketable venture capital funds, which offer retail investors exposure to investments in high-tech companies which are not yet ready for the public market, while the companies gain additional funding alternatives,” Anat Guetta said.
Investment Opportunities in Israel
Software & IT
Last year, over $2.7 billion was invested in the cybersecurity industry to support companies operating across all stages, which means a 97% increase as compared to the previous year. The main stimuli include the government’s support and connections with Silicon Valley. Nearly 60% of newly founded cybersecurity firms in Israel received seed rounds in 2020, while the number of newly founded companies was up by 5%. In the first half of 2021, Israeli cybersecurity firms raised a record amount of $3.4 billion in half a hundred deals, with 7 of these firms becoming unicorns, according to the Israel National Cyber Directorate. This accounts for 41% of all funds raised by cybersecurity companies globally, and is three times the amount raised in the same period of 2020.
The most notable cybersecurity unicorns are Forter, Cato Networks, Wiz, BigID, Aqua Security, Cybereason, Riskified, Axonius, Snyk, Orca Security, OwnBackup, Claroty, and Transmit Security. SentinelOne, Inc. (NYSE:S) left the ranks of unicorns when it completed an IPO on the New York Stock Exchange, raising $1.2 billion. That has become “the highest-valued cybersecurity IPO in history.” SentinelOne’s revenue has grown 108% year over year to $37.4 million, however, its net losses increased, too, from $26 million to $62 million.
Investments in fintech constituted 19% of the total investments in Israeli innovation technology companies during the first half of 2021, amounting to $12.2 billion. While fintech is a mature sector in Israel, new startups keep emerging there. From 2019 to 2021, around 70% of investments in Israel’s fintech industry went to three major segments: payments, insurance, and anti-fraud solutions. The payments segment is the largest one and made up 35% of all fintech funding in the first half of this year. Private companies Rapyd, Forter, and Melio were among the main beneficiaries of the rising demand amid the pandemic. There was also a growth in investments in enterprise solutions triggered by the rising demand for corporate innovation.
The highest-valued Israeli software stocks include NICE Ltd. (NASDAQ:NICE, TASE:NICE), Check Point Software Technologies Ltd. (NASDAQ:CHKP), Monday.com Ltd. (MNDY), Wix.com Ltd. (WIX), and Playtika Holding Corp. (PLTK) that have a market capitalization of $18.5 billion, $14.5 billion, $12 billion, $8.2 billion, and $7 billion, respectively. NICE provides enterprise software solutions, Check Point sells products and services for IT security, Monday.com develops software applications, Wix.com offers cloud-based web development services, and Playtika Holding Corp. is a mobile games developing company.
Life sciences & Pharmaceuticals
Israel is one of the major healthcare and pharmaceuticals markets in the Middle East and its pharmaceutical sector is the most established sector of the national life science industry. The life sciences industry consists of biotechnology, medical devices, pharmaceutical therapeutics, and digital health sectors. The medical device segment dominates the market, accounting for around 40% of the life science companies in 2020. Digital health and biotechnology segments are the second and third-largest segments with 468 and 476 enterprises, respectively, or more than 50% of all life science companies.
Last year, Israel’s life sciences companies raised a record $2.5 billion, which represents a 55% year-on-year increase, the Israel Advanced Technology Industries (IATI) reports. In the first quarter of this year, Israeli life sciences firms raised $900 million, making it the best first quarter in 10 years. “The Life Sciences and Health Technologies (health-tech) market is considered one of the largest in the world and Israel has unique assets that constitute a potential for global leadership,” said IATI’s CEO Karin Mayer Rubinstein. Over the last decade, more than 1,500 life science companies have been set up in Israel. However, the number of newly established life science companies in the country has declined, which can be explained by the COVID-19 restrictions.
Israel is home to Teva Pharmaceutical Industries (NYSE:TEVA), the largest producer of generics in the world and a major player in the production of pharmaceutical active ingredients. In October, pharmaceutical giants Pfizer, AstraZeneca, Merck, and Teva Pharmaceuticals established a new innovation lab in Israel. The laboratory called AION Labs is in charge of promoting the creation of new startups that focus on advanced AI-based technologies to help discover personalized drugs for people. The facility is headed by Mati Gill, a former executive at Teva Pharmaceuticals.
Dozens of companies that were established in Israel have been listed on key U.S. indices, such as the NYSE and NASDAQ. There are a number of publicly-listed Israeli companies that are developing emerging COVID-19 treatments. Bonus Biogroup (TASE:BONS) is working to apply cell therapy and regenerative medicine to the treatment of severe coronavirus cases. Oramed Pharmaceuticals Inc (NASDAQ:ORMP), the second-largest Israeli pharmaceuticals stock after Teva, started clinical trials for a single-dose orally administered vaccine that has a huge potential to boost vaccination rates in developing countries. Redhill Biopharma Ltd (NASDAQ:RDHL) has completed a Phase II/III study of an oral treatment for severe coronavirus cases. The data shows a 62% statistically significant reduction in mortality for moderately severe Covid-19 patients treated with the drug.
Green Energy
In 2015, the Israeli Cabinet adopted a greenhouse gas emission reduction plan that set the goal of a 26% decrease in emission levels by 2030. Last year, the government raised the target to 30%. The plan envisages investments in the amount of $23 billion, with around 50% of this sum being spent on power plants. That said, solar power is expected to account for 90% of all renewable energy in Israel, while wind, biomass, and water will provide only 10% of electricity. To this end, Israel has to increase its installed solar capacity from 2.24 GW in 2020 to 15.7 GW. More importantly, Israel will have to create an advanced storage system that will be able to accumulate sufficient energy for the times when the sun is not shining.
“As Israel doesn't have many different natural resources, we don't have a lot of potential for hydro facilities, and the wind is also quite limited. To reach high targets for renewables, we have to rely on solar energy,” said Yoav Katsavoy, Head of Electricity Regulatory Authority.
However, Israel failed to meet its renewable energy targets and as of 2020, only 6% of the country’s electricity is generated from renewable sources. The main obstacles include bureaucratic hurdles as well as the lack of land resources and developed transmission infrastructure. In addition, Israel has recently discovered natural gas fields in its Eastern Mediterranean offshore areas, something that is viewed as a less expensive electricity generation source as compared to solar power. The Energy Ministry and Electricity Authority explained the missed target by the delays in solar panel installations due to the pandemic restrictions.
Enlight Renewable Energy Ltd (ENLT.TA) with a market capitalization of $2.3 billion builds and operates solar and wind power projects. In particular, the company completed the Halutziot project, one of the largest solar parks in Israel, with the capacity to provide power to 15,000 homes. In August, Enlight Renewable Energy acquired Clenera that builds and manages utility-scale solar farms and energy storage facilities in the United States. The deal significantly expands the portfolio of the Israeli company to 16.8 GW DC and 7.5 GWh of energy storage. Doral Renewable Energy Resources (DORL.TA) is among the leading companies producing electricity for Israel’s grid. The company has operated in the domestic and international markets for 13 years.
Major Publicly Traded Companies in Israel
NICE Ltd. (NASDAQ:NICE, TASE:NICE), a leading provider of software solutions, is the largest Israeli company by market capitalization. More than 25,000 organizations in over 150 countries are NICE’s partners. In August, NICE reported accelerated total revenue growth, especially in its cloud business. Total revenue has increased 16% year-over-year to $456 million, while cloud revenue showed a stunning growth rate of 32% year-over-year to $243 million. Operating income was up by 14% to $64 million and gross margin increased to 67.0% as compared to 65.5% last year.
Solaredge Technologies (SEDG), a manufacturer of inverter systems for solar systems, will join the index of the 500 largest companies traded on Wall Street — the S&P 500 Index — on December 20. Headquartered in the Israeli city of Herzliya, Solaredge is incorporated in the USA and has a market capitalization of $16 billion, providing a 1,600% return since its IPO in 2015. This makes Solaredge the second most valuable Israeli company after NICE and ahead of Check Point. In the first 9 months of this year, the company’s revenue amounted to $1.41 billion, a 28% increase from the same period of the last year. However, after rising 235% in 2020, SolarEdge stock was down by 13% at the beginning of 2021.
According to Forbes’ list of the 2000 biggest public companies, Teva Pharmaceutical Industries (NYSE:TEVA) is the largest company in Israel with $16.6 billion of annual sales and $50.6 billion of assets. This is a popular stock and Teva is among the 20 leading pharmaceutical companies in the world. Teva Pharmaceutical specializes in generic drugs and has around 150 pharmaceutical products. It is noteworthy, though, that some analysts warn against buying TEVA stock, claiming that it is a risky investment. Over the last years, TEVA’s quarterly revenue has declined by 2.3% and in the last 5 years, its net income has dropped by 54%.
Bank Hapoalim B.M. (POLI.TA) with $168 billion of assets provides financial services in Israel and abroad. Forbes ranks the bank as second after Teva Pharmaceutical in the list of Israeli largest public companies. Its stock has been on the rise since September 2020 and revenue for the 12 months ending June 30, 2021, was up by 12% year on year to $4.7 billion. This indicates a reverse trend after several years of declining revenue. In November, the bank announced that it would make a strategic investment worth $10 million in the Israeli fintech startup Neema that has developed a digital wallet for money transfers and other financial services.
Check Point Software Technologies Ltd. (NASDAQ:CHKP) is the third-largest Israeli company by market capitalization ($14.5 billion) and the fifth-largest company in Israel based on the Forbes ranking. The company develops and sells products and services for IT security to enterprises and consumers. Check Point’s revenue has been rising steadily from $1.7 billion in 2016 to $2 billion in 2020. In October, the company raised its estimates for 2021 after the better-than-expected performance of its consolidated cyber security platform and cloud protection products. Now, Check Point expects a strong fourth quarter, with up to $605 million of revenue and $2.2 of adjusted EPS. For the full 2021 year, the company expects revenue of $2.13-$2.72 billion and adjusted EPS of $6.81-$7.01. Read more: Gil Shwed, Co-Founder & CEO of Check Point Software Technologies Ltd | Company & CEO Profile