Malware has evolved from the pesky viruses that infected home computers during the 1990s and early 2000s.
These days, cyberattacks are much more malicious, infiltrating entire networks and causing massive disruptions to businesses and supply chains. Ransomware can ruin people financially and destroy reputations, and unfortunately the personal information you give to even the most reputable company is at risk of being stolen by hackers.
Does that mean now is a good time to invest in cybersecurity stocks? Read on to learn more about what cybersecurity is, what trends are driving the market and how to get exposure to this increasingly important tech sector.
What is cybersecurity?
Cybersecurity is defined as any act that protects digital systems, networks and programs from attacks that aim to access, destroy, alter, steal or exploit information. Often overlooked, the cybersecurity industry has never been more important than it is today, with attackers targeting multimillion-dollar companies, vital supply chain hubs and even government organizations.
The recent attacks against MGM Grand and Caesar’s Palace in Las Vegas show just how sophisticated attackers can be — they were carried out by skilled hacktivist group Scattered Spider (also known as UNC3944), which used advanced cloud-jacking techniques to pull off its plans. Scattered Spider may have worked with the group ALPHV as well.
Artificial intelligence (AI) and generative AI also make launching an attack easier than you might think. Deepfakes, for example, use generative AI to recreate a person’s likeness and represent a significant security threat.
Given those circumstances, it’s more crucial than ever for companies across the board to have excellent cybersecurity defenses in place. Cybersecurity needs to evolve at the same pace as malware — or ideally ahead of it — which might make the sector one of the most exciting tech industries for investors.
Is now a good time to invest in cybersecurity?
An internet crime report from America’s Federal Bureau of Investigation reveals that cybercrime resulted in losses of over US$10 billion in 2022 and roughly US$27.6 billion over the last five years. At the company level, a report published by IBM (NYSE:IBM) estimates that a single cybersecurity breach could end up costing a company US$4.45 million — and that’s not even considering the damage an attack could do to an enterprise’s reputation.
Following an astonishing rise in cyberattacks in 2022, the US Securities and Exchange Commission came to a ruling in July 2023 that leaves companies with little to hide behind should an attack take place — it’s placed pressure on security executives to make sure sensitive data is protected with the most advanced cybersecurity options available.
Against that backdrop, Cyber Security Ventures notes that cybersecurity firms are scrambling to fill an estimated 3.5 million jobs, even as tech giants have been going through mass layoffs all year. The firm also states that those roles will likely remain unfilled through 2025, indicating that this is a sector that may be poised for a boom.
Indeed, seasoned investor Catharine Trebnik disclosed to Bloomberg News in June 2023 that she has a bullish outlook on cybersecurity stocks because she knows it’s an area where companies can’t afford to cut costs.
Cisco Systems’ (NASDAQ:CSCO) recently announced acquisition of Splunk (NASDAQ:SPLK), the fifth security acquisition of the year for the networking equipment producer, speaks to business leaders’ confidence in the cybersecurity market. The deal, worth a staggering US$28 billion, is the largest acquisition in history for Cisco and amounts to around 13 percent of its market cap. Splunk is a software company that builds data-analyzing software that helps companies identify security vulnerabilities.
Why are cybersecurity stocks down?
If the cybersecurity space is hot right now, why are cybersecurity stocks down? Market participants have speculated that they may be underperforming due to recession concerns; meanwhile, the banking crisis earlier this year could have spooked investors into focusing on well-known ‘safe’ companies with the capital to back themselves up. Some people are simply choosing to put their money in areas of the tech industry that have more impressive projections — for example, AI.
Smaller cybersecurity companies have also taken hits as large tech players jump into the sector. When Microsoft (NASDAQ:MSFT) rolled out a new generative AI-powered cybersecurity system to replace Azure, the share prices of a handful of lesser-known cloud-based network security companies saw their share prices dip between 5 and 7 percent.
Microsoft is a powerhouse whose popularity dwarfs that of smaller-scale companies like Zscaler (NASDAQ:ZS), and investors keen to make a profit in cybersecurity might feel more confident investing in a company with an endless number of resources at its disposal and a proven track record of success.
Another recent headwind for cybersecurity stocks came when deals between Fortinet (NASDAQ:FTNT) and a number of enterprises were halted or delayed just days before the cybersecurity company released its Q2 report. The ensuing cut in Fortinet’s revenue guidance resulted in a wave of panic that rippled throughout the industry. Other cybersecurity firms saw noticeable share price drops after the news hit — Palo Alto Networks (NASDAQ:PANW), CrowdStrike (NASDAQ:CRWD) and Zscaler were among the companies that were affected.
How to invest in cybersecurity?
There are a lot of good reasons to consider investing in cybersecurity, but what’s the best course of action if you want to invest? If you don’t know much about cybersecurity or the tech industry, exchange-traded funds (ETFs) are an easy way to dip your toe in the water without much threat of losing your investment.
There are currently only seven publicly traded cybersecurity ETFs on the US market. The three funds with the most assets under management are the First Trust NASDAQ Cybersecurity ETF (NASDAQ:CIBR), the ETFMG Prime Cyber Security ETF (ARCA:HACK) and the Global X Cybersecurity ETF (NASDAQ:BUG).
For a detailed description of each ETF and more cybersecurity ETF ideas, click here.
If you want to invest in cybersecurity stocks, you have many more options. Top stocks that several news outlets have been following in 2023 include Broadcom (NASDAQ:AVGO), a global tech firm with a portfolio that includes payment authentication software and a host of Symantec cybersecurity software; Cisco, which has been bolstering its cybersecurity service lineup all year; tech giant IBM (NYSE:IBM); California-based Palo Alto Networks, which has several cloud-based cybersecurity solutions, as well as advanced firewall protection; and Fortinet, a diverse cybersecurity company.
For a list of the 10 biggest cybersecurity stocks by market cap, click here.
What is the outlook for cybersecurity?
Unsurprisingly, developments in cybersecurity will follow the patterns established by cyberattacks. According to the World Economic Forum’s Global Cybersecurity Outlook 2023 report, ransomware as a service (RaaS) attacks are on the rise, and companies will need to be armed with programs that can detect and block RaaS threats.
Aside from that, sophisticated AI-powered technology will be required to combat the rise of AI-enabled attacks. This is an especially important area of cybersecurity research as generative AI has the potential to learn how to work around traditional and even newly designed security features.
Impenetrable data-access software will be needed to prevent large-scale supply chain attack attempts, which are expected to continue. Finally, cloud jacking opens the door for hackers to carry out other attacks and has the potential to devastate entire cloud environments. Cloud-based security software will be needed to prevent such breaches of security.
In terms of market growth, Grand View Research projects that the cybersecurity industry will grow at a compound annual growth rate (CAGR) of 12.3 percent from now until 2030. The firm estimates that the industry will be worth US$500.7 billion by 2030. Although the growth is not staggering, it still falls within the desired 10 to 20 percent CAGR range for stocks.
As people to rely more on the internet in all aspects of life, data security is becoming increasingly important. The exact trajectory for the cybersecurity industry and cybersecurity stocks is uncertain, but it’s clearly that cybersecurity is a crucial component for any successful business in the current digital age. With the continuous emergence of new threats, the cybersecurity industry is poised to experience growth in the coming years.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.