Identifying secular themes that can grow rapidly regardless of the business cycle is a key part of our investment approach. When looking for investable secular themes, we want to see structural change in a sector or industry that creates a wave of new demand that is sustainable and materially higher than the economy's cyclical growth rate. We believe Cybersecurity is a secular theme that will grow rapidly for many years, if not decades. Here are a few thoughts on the theme of cybersecurity:
What is Cybersecurity?
Cybersecurity focuses on protecting computers, networks, programs, and data from unauthorized and/or unintended access. It encompasses all software, systems, and equipment used to protect us from malicious activities and cybercrime. Including system breaches, phishing, privileged-access credential abuse, and endpoint security attacks.
How big is Cybercrime?
The cybercrime statistics are sobering, with the number of occurrences increasing fast, and financial damages often reaching catastrophic amounts.
- Cybercrime will cost the world $6 trillion in 2021, and $10.5 trillion annually by 2025. Representing one of the greatest transfers of wealth in history.1
- The average total cost of a data breach is $4.24 million in 2021, which is up from $3.86 million in 2020. 2
- US ransomware attacks cost an estimated $915 million in 2020. 3
The cost and damage of cyberattacks underpins why Cybersecurity spending has become a “must-have” for businesses of all sizes.
What's driving the growth of Cybersecurity solutions?
The universe of Cybersecurity can be split into three major areas: Physical Network Infrastructure, Digital Network Infrastructure, and Cloud and Data Security. Demand for their services is rising due to:
- Digitization of processes, remote work, and the shift to Cloud computing
- Cyber-Space is becoming a new realm of (Geo) Political conflict and government spending is soaring
- Corporate spending on Cybersecurity services are soaring
A quick look at the growth opportunity:
It is estimated that Cybersecurity sales year-over-year growth is soaring at 40% this year and dwarfs the rate of sales growth of general software and services. It is expected that Cybersecurity spending will outpace general software spending by almost 4.9% annualized from 2020 to 2024. See the charts below:
Investment Implications:
Cybersecurity is increasingly important for businesses and governments in the US and abroad, with demand for solutions surging. As a result, we believe Cybersecurity is a secular theme worthy of investing in for the long-term. Although we fully expect that given the rapid growth rates and high valuations in many cases, it is likely to be volatile, however, the long-term upside should justify the day-to-day volatility. Our preferred way to invest in this theme is via an exchange-traded fund (ETF) that will give us broad exposure to Cybersecurity stocks. Our top choice is the First Trust Cybersecurity ETF, ticker symbol CIBR. CIBR is designed to track the NASDAQ CTA Cybersecurity Index which currently holds 36 stocks in the Cybersecurity field. Depending on your risk tolerance and objectives we may add this fund to your portfolio.
If you would like to discuss this secular investment theme or others don't hesitate to give us a call.
