Cybersecurity: A Long-Term Growth Trend
September 20, 2023
With Q2 earnings season almost done and dusted, one subsector that fared well was cybersecurity with most leading cybersecurity companies beating analysts’ forecasts. The Nasdaq CTA Cybersecurity Index has outperformed other subsector peers since earnings season kicked off on 14 Jul. The cybersecurity space has witnessed exponential growth in recent times. According to the International Data Corporation, the global cybersecurity market is projected to grow 12% annually, from $210bn in 2023, to $300bn in 2026. What has contributed to its growth, and can it continue? We explore some key drivers below.
Cybersecurity demand rocketed after Covid-induced lockdowns resulted in a shift towards remote work and cloud adoption. Since then, we’ve witnessed other tech-related trends such as cryptocurrencies and blockchain, the metaverse, 5G and generative AI. As the world becomes more technologically interconnected and dependent, the risk of cyberattacks rises as well. Cybersecurity is imperative in safeguarding digital assets and online systems.
Increasingly, cybersecurity is becoming a key component of regulatory compliance. Governments and regulatory bodies worldwide have introduced stringent data security and privacy regulations to safeguard individuals’ rights and sensitive information. Compliance with these regulations, such as GDPR in Europe, CCPA and HIPAA in the US, is not just a legal requirement but also a moral obligation for organizations.
Costs related to cybercrimes are rising too. According to IBM, cyber-attacks rose 38% yoy in 2022, with the average data breach costing a company ~$4.35 million. With much to lose, companies’ cybersecurity budgets have increased steadily. On a national level, the stakes are higher. A Google report showed cyberattacks on NATO member countries increased 300% yoy in 2022. Due to simmering geopolitical tensions, governments have beefed up cybersecurity spending with the aim of protecting critical infrastructure and sensitive classified information. For 2024, the Biden administration is proposing a cybersecurity budget of $24 billion, a more than double increase from 2023.
Lastly, valuation metrics remain appealing. Compared to the broader Software & Services group, the ISE Cybersecurity Index trades at an attractive discount (>75%) in terms of price-to-sales (P/S) ratio. On a historical basis, its P/S of 1.69x is currently near an all-time low. In conclusion, we think of cybersecurity as a structural investment theme, which warrants a long-term position in one’s asset allocation portfolio. The more entrenched in tech the world gets, the greater the need for cybersecurity.
Disclosures
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The Nasdaq CTA Cybersecurity Index is designed to track the performance of companies engaged in the Cybersecurity segment of the technology and industrial sectors. The Index includes companies primarily involved in the building, implementation and management of security protocols applied to private and public networks, computers and mobile devices in order to provide protection of the integrity of data and network operations.
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The ISE CTA Cloud Computing Index is designed to track the performance of companies actively involved in the cloud computing industry.
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