The Pandemic’s A Turning Point For Cybersecurity Firms

The Pandemic’s A Turning Point For Cybersecurity Firms
Reda Farran, CFA

almost 3 years ago4 mins

Mentioned in story

What’s going on here?

This remote-working lifestyle is here to stay for a world of bankers, lawyers, and government staffers alike – and all that sensitive data floating around could make booming cybersecurity firms boom even harder.

What does this mean?

The cybersecurity market is already big business: you only need to look at British cybersecurity firm Darktrace – whose share price jumped 32% on its stock market debut last month – to see that. And it’s growing fast, with one research group even predicting the global cybersecurity market will grow by 15% on average annually from 2019 to 2026. If it manages that, it’ll be worth $400 billion.

Growth forecasts for the global cybersecurity market (Source: Global Market Insights)
Growth forecasts for the global cybersecurity market (Source: Global Market Insights)

The threat of cyberattacks, after all, has been increasing over the past few years. And not just in frequency: they’re becoming more costly too. The cost of cleaning up the SolarWinds hack alone – which penetrated thousands of global organizations in 2020, including Microsoft and the US nuclear weapons agency – is estimated to be as much as $100 billion.

And now, the pandemic has boosted the industry even more. Its arrival forced businesses worldwide to take their operations online, and their employees to take their work – as well as pretty sensitive data, like medical records and financial statements – home with them. Anything they now want to access, they need to do it via the internet – and that’s significantly bumped up the threat of cyber attacks on vulnerable systems.

So it’s no massive surprise that cybersecurity’s become one of the most important areas for companies to spend their money on. Not to mention a cost that – unlike things like marketing – they can’t risk dialing back on even when times are bad. Investors, for their part, seem to agree: one study showed they’re demanding higher returns when they invest in companies that are more exposed to cyber threats, as compensation for the higher risk.

Consider too that the cybersecurity industry isn’t just the hero we need right now, but one we’ll need in the future too. Investing in the cybersecurity industry is a tangential (and overlooked) way to play a potentially huge investment theme: quantum computing – an industry that promises a giant leap forward in computing power. With great power comes great responsibility, and there’ll be malicious groups out there that use the tech to hack even the most heavily encrypted networks.

Cue cybersecurity firms, which are working on defenses that can withstand an assault from a quantum computer – defenses that organizations will pay an arm and a leg for when quantum computing goes mainstream…

Why should I care?

The renewed post-pandemic emphasis on cybersecurity firms could be too good an opportunity for you to miss, so we’ve compared the key financials of ten of the biggest and most promising of them.

Ten cybersecurity stocks compared (Data source: Bloomberg)
Ten cybersecurity stocks compared (Data source: Bloomberg)

A few interesting things stand out here. First, the median valuation multiple of the stocks – the ratio of its “enterprise value” (that is, the value of the company’s outstanding shares plus its debt) to this year’s forecasted sales – is almost 9x. That’s 50% higher than the wider IT sector’s 6x, and not exactly cheap. Three of them look particularly expensive: Crowdstrike, Okta, and Zscaler. But that might be because investors are over-excited about their growth prospects, with all three forecasted to grow sales by 50% on average this year.

In fact, the overall valuation levels of the industry go to show how optimistic investors are about these companies’ future prospects. Analysts are too: their price targets for the stocks are all higher than their current stock prices. California’s FireEye – which they think has a 50% upside potential – is a particular favorite of theirs.

But to my mind, Fortinet stands out in terms of profitability: the developer of security software generated an impressive 40% return on invested capital last year. So does NortonLifeLock: the maker of the eponymous antivirus software managed to eke out a positive return on invested capital last year, and it boasts a valuation multiple cheaper than the rest.

Otherwise, you could always get wider exposure to the industry through our old friends ETFs. Two of the biggest are the ETFMG Prime Cyber Security ETF – listed under the delightful ticker HACK – and the First Trust Nasdaq Cybersecurity ETF, listed under the comparatively mundane ticker CIBR. Just whatever you invest in, make sure you do it using a secure server: you never know who’s watching…

Key takeaways

  • The cybersecurity market’s big business, with one researcher even predicting it’ll grow by 15% on average annually from 2019 to 2026.
  • And it’s getting a boost thanks to pandemic-driven remote working, the increasing frequency and cost of hacks, and concerns around quantum computing.
  • So take a look at the particularly promising Fortinet and NortonLifeLock, as well as a couple of ETFS: the ETFMG Prime Cyber Security ETF and the First Trust Nasdaq Cybersecurity ETF.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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