Investors have seen plenty of news recently about increases in ransomware attacks, in which hackers lock up systems and attempt to force victims to pay a ransom to save their data and resume normal operations. Perhaps the most notable example was the attack on Colonial Pipeline, which halted the largest fuel pipeline in the U.S. for five days.
As the digital environment grows, especially digital workplaces and the increasing shift to cloud operations, ransomware attacks are increasing as well. While cloud enterprises are one way to invest in digitalization, cybersecurity companies are another, equally essential type of business that will grow along with the digital environment.
According to an April report by Grand View Research, the global market for cybersecurity services is expected to reach $192.70 billion by 2028, representing a compound annual growth rate of 10.2%.
Thus, investors may want to have a look at the below cybersecurity-focused stocks and exchange-traded funds, as the increase in demand for digital security will likely drive demand for their products and push their share prices higher.
Individual stocks
Investors looking for individual stock picks in the cybersecurity business may be interested in CrowdStrike Holdings Inc. (CRWD, Financial), Palo Alto Networks Inc. (PANW, Financial) or Cisco Systems Inc. (CSCO, Financial). All of these companies have cybersecurity offerings, yet they differ in their corporate structure.
Cisco Systems’ main business is its core networking hardware products, with cybersecurity representing only 7% of its overall revenue in the first nine months of fiscal 2021. However, the company’s end-to-end cybersecurity services still generate more revenue than CrowdStrike and many other smaller cybersecurity companies, and this part of its business will also be one of its fastest-growing going forward.
As a larger, more established company than new pure-play competitors, Cisco trades with a price-earnings ratio of 22.35 and a forward price-earnings ratio of 15.91 based on earnings estimates from Morningstar, making it a better fit for value-oriented portfolios. Over the past year, shares have gained 11% to trade around $53.85 on June 7.
For those looking for a pure-play option in the cybersecurity space, one company to look at is Palo Alto Networks. The global cybersecurity leader was founded in 2005 and provides both on-site and cloud-based services through three main security platforms: Strata, which is built atop its next-gen firewall appliances; Cortex, an artificial intelligence-powered threat detection platform; and Prisma, its suite of cloud-based security services. In addition to growth in the cybersecurity market, cross-selling across its three platforms could be another source of revenue growth for the company in the near future.
Palo Alto has yet to turn a yearly profit, though analysts are expecting a shift to profitability by 2022. The forward price-earnings ratio is 49.75. Over the past year, shares have gained 49% to trade around $356.37 on June 7.
The third cybersecurity company we will take a look at is CrowdStrike, which has a cloud-native approach to cybersecurity and eschews more costly on-site appliances entirely. Founded 10 years ago, CrowdStrike’s business strategy is based around modules, aiming to start customers on one module and then cross-sell other modules. As of the end of the company’s fiscal year 2021, which ended in January, 47% of CrowdStrike's subscribers had adopted five or more of its modules, up from 33% a year ago. This stickier and less cost-intensive business model seems to be working well for the company so far as it already serves nearly half of the Fortune 100.
The only downside is that the company’s fast growth comes with a price tag to match; the forward price-earnings ratio is 782.95, and analysts are not expecting a yearly profit from this name until at least fiscal 2025. Over the past year, shares have gained 125% to trade around $215.15 on June 7.
ETFs
Those who are interested in investing some funds in the cybersecurity megatrend but who do not wish to try and pick out individual winners may find exchange-traded funds a better choice. Cybersecurity-focused ETFs allow investors to bet on the overall market for security services in the digital world without having to keep up due diligence on individual companies.
There are four main U.S. ETFs that are focused on the cybersecurity sector: the Global X Cybersecurity ETF (BUG, Financial), the First Trust NASDAQ CEA Cybersecurity ETF (CIBR, Financial), the iShares Cybersecurity and Tech ETF (IHAK, Financial) and the ETFMG Prime Cyber Security ETF (HACK, Financial).
The Global X Cybersecurity ETF tracks the Indxx Cybersecurity Index, investing in companies across the market cap spectrum that are expected to benefit from increasing adoption of cybersecurity technology, including companies that offer security against intrusion and attacks on systems, networks, applications, computers and mobile devices. After a 41% gain over the past year, the ETF traded for a price of $27.49 on June 7.
The First Trust NASDAQ CEA Cybersecurity ETF tracks the NASDAQ CTA Cyber Security Index, which is designed to gauge the performance of cybersecurity companies within the U.S. technology and industrials sectors. Each of the holdings must be classified as a cybersecurity company by the Consumer Technology Association, have a market cap of at least $250 million and must meet certain liquidity requirements. After a 35% gain over the past year, the ETF traded for a price of $44.60 on June 7.
The iShares Cybersecurity and Tech ETF tracks the NYSE FactSet Global Cyber Security Index, which is made up of cybersecurity and technology stocks engaged in cybersecurity hardware, software, products and services. Most of its holdings are U.S.-based companies, but it does have some that are based in Israel, Japan, Canada, the U.K. and Taiwan. After a 35% gain over the past year, the ETF traded for a price of $41.72 on June 7.
The ETFMG Prime Cyber Security ETF tracks the Prime Cyber Defense Index, which consists of the securities of companies that 1) engage in providing cyber defense applications or services as a vital component of its overall business or 2) provide hardware or software for cyber defense activities as a vital component of overall business. After a 33% gain over the past year, the ETF traded for a price 0f $59.79 on June 7.
