In the past year or so, there have been any number of high profile Cybersecurity incidents that have captured the world’s imagination. None other has drawn the spotlight more fully than the ongoing “Russia Gate” investigations. However, other incidents before that, like the massive Equifax data breach, the attack on VISA and Master Card, and the compromising of a huge number of Yahoo accounts have all confirmed that:
Cyber threats are real. They are causing massive damage to companies and economies. And, they are likely to grow in sophistication and scale!
As investors then, the best investment opportunities often lie where there are real threats – and Cybersecurity investments offer just such an opportunity. According to one reliable estimate, the size of the cybersecurity market is set to expand to US$18.5B by 2026, from roughly US$11.9B in 2016. Other estimates are for this business to grow from US$137.85B in 2017 to US$231.94B by 2022.
Regardless of which numbers you believe, the fact that governments and companies are investing heavily in Cybersecurity tells us something: That companies in the Cybersecurity business can expect a steady inflow of revenue over the next decade or so.
The opportunity for investors in these businesses is therefore real, and the business case for allocating at least some part of your portfolio to them is compelling.
If you wish to invest just a small part of your portfolio in Cybersecurity, how would you go about it? Well, you could do it in two ways:
- Invest directly in a couple of Cybersecurity companies; OR
- Invest in an ETF that owns a basket of Cybersecurity companies
Two Cybersecurity stocks to consider are:
CyberArk Software Ltd. | $CYBR |, that develops and markets software-based cybersecurity solutions to protect companies and governments from global cyber threats. As an innovator, CYBR’s recently launched security-as-a-service solution, CyberArk Privilege Cloud, is receiving a lot of investor attention.
Over the past year, CYBR investors have been handsomely rewarded with an almost 30% price appreciation.
Carbonite, Inc. | $CARB | is our next pick in the Cybersecurity business. While not directly offering software solutions, CARB delivers services, including disaster-recovery, backup and recovery and high-availability offerings that companies (and governments) battling Cyber-attacks are always in need of. It’s unique solution, Carbonite Safe, offers a cloud-based back-up option for safe/secure off-site data storage, while its Endpoint Protection helps secure computer data stored on laptops, tablets, smartphones and desktop computers and servers.
Over the past year, CARB has returned nearly 70% in capital appreciation to its investors.
For those investors that are looking to invest in Cybersecurity, but don’t trust their own stock-picking prowess, ETFMG Financial LLC’s exchange-traded fund ETFMG Prime Cyber Security ETF | $HACK | might be worth considering.
In one single investment, you’ll own a basket of roughly 50 of the most notable Cybersecurity stocks in the world today. Over a 1-year period, HACK has delivered a 25+ percent price appreciation. You get this performance for an MER of just 0.60%.
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As discussed earlier, Cyber crime is huge…and growing bigger by the day. There was a time that it used to be the exclusive domain of lone wolves and anarchists – but no longer! Today, state-sponsored “bad actors”, as well as government agents have jumped into the fray. And that makes investing in companies tackling this menace all the more opportune.
Sadly however, as with any other sector, Cybersecurity companies aren’t immune to the same risks that other companies face. So, when making an investment decision, ask yourself:
- Is this company likely to become profitable in the near future – if not already? (Check its Financial Statements for clues – but don’t expect early-stage start-ups to become overnight cashflow generation machines)
- Is the company too heavily leveraged? (Check its Balance sheet for signs)
- Is the company fairly valued? Forget traditional Price-to-Earnings. Use the Enterprise Value/Forward-Earnings and Price-Earnings-Growth (PEG) ratio
- How is the company positioned viz. its peers and competitors? Do some research and check out news items about the company
And finally, many Cybersecurity companies play in the micro to small cap space, so expect trading volatility and lots of mergers and acquisitions.
Author does not have investment in stocks discussed in this article.