During the global pandemic, companies that were more digitized did better, and technology is likely to continue to be a growth driver in the future. Globally, it is thought that companies that use digital tools will see their profit margins rise by an average of 12% to 20%.
But the rise of digital technologies has also made it easier for cybercriminals to do more damage. Malware (bad software) attacks more than tripled from 2019 to 2020, and ransomware attacks (virtual extortion of companies) more than quadrupled.
Cybersecurity investment trends
Cyberattacks can happen to any company, no matter how big or small, that stores information on servers. Because of this, there are now a lot more companies that offer cybersecurity services than there used to be.
These trends may be some of the best places to invest in technology for the long term right now. This covers both cybersecurity corporations and defense companies that aim to increase their cyber capabilities due to foreign threats.
Here’s a closer look at what analysts think are the most important things driving this technology megatrend and how investors can profit from it.
Big data, big risks
As more data is created and more ways are found to connect to networks, cybercriminals find new holes to exploit. From only four major cyberattacks in 2006 to a peak of 134 in 2020, the number of major cyberattacks has grown. As the number of attacks has gone up, so have the costs for the people who have been hurt. IBM found that the average cost of a data breach in the U.S. has gone from $3.5 million in 2006 to $9.4 million in 2022, which is an increase of nearly 170% in 16 years.
The kinds of cyber threats have also changed over time. Cybercriminals used to focus a lot on stealing personal information like credit card numbers and Social Security numbers. Even though these threats still exist, most major cyberattacks today come from geopolitical foes like China, Iran, North Korea, and Russia. These attacks often try to shut down important supply chains and infrastructure, like the U.S. power grid.
Cybersecurity providers have a lot of potential for growth
In the end, the fact that cybercrime is becoming more and more of a threat is creating an opportunity for cybersecurity providers. Morgan Stanley Research predicts that security software companies will make more than $45 billion in direct sales by 2020. This is an increase of 12% per year over three years, which makes security one of the fastest-growing areas of technology.
This growth is likely to keep going in the years to come. In a recent survey of chief information officers, Morgan Stanley Research found that spending on cybersecurity is likely to grow faster than spending on other types of software. It’s also likely to be more stable at a time when technology budgets as a whole could be under pressure. Respondents said there was less chance of spending cuts in security than in other software areas.
How to invest in cybersecurity?
There are several ways for investors to look into how their portfolios can benefit from the strong long-term growth in the cybersecurity and defense industries.
Thematic ETFs
For example, thematic exchange-traded funds (ETFs) can give investors a wide range of exposure to U.S. and international companies that focus on network security.
Top 3 cybersecurity ETFs
Our top cybersecurity ETF recommendations include:
First Trust NASDAQ CEA Cybersecurity ETF
By mid-2022, the First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR) had $4.8 billion in assets under management, making it the largest of its kind. The ETF is made up of 37 stocks in the cybersecurity industry. It has an annual expense ratio of 0.6%, which makes it an affordable choice.
ETFMG Prime Cyber Security ETF
The ETFMG Prime Cyber Security ETF is also important in this market (NYSEMKT:HACK). With 60 stocks, the ETF invests in a lot of relatively small cybersecurity companies. The fund is in charge of $1.5 billion and has a 0.6% expense ratio.
Global X Cybersecurity ETF
The Global X Cybersecurity ETF (NASDAQ:BUG) came out at the end of 2019 and is a new ETF in the cybersecurity space. At the middle of 2022, the fund had assets worth $1.1 billion and a cost of 0.5%. The portfolio of the Global X Cybersecurity ETF is also smaller, with only 25 stocks. Since it started, the fund has done better than the other ones on this list.
Investing in a single stock
Consider firms working in three categories if you’re looking for pure-play single-stock investments.
Top endpoint security providers
Top endpoint security providers have traditionally focused on protecting a network’s perimeter by securing entry points on all connected devices, such as computers and cell phones. Solutions in this subsector of the industry have changed from simple antivirus software to full protection against complex malware.
Our pick
CrowdStrike Holdings
A cloud-native software company, CrowdStrike Holdings (NASDAQ:CRWD) offers endpoint security, which protects devices like laptops, PCs, servers, and anything else connected to a network. CrowdStrike is great for supporting remote work because it is based in the cloud.
Even though the high-priced stock has taken a lot of damage in 2022, CrowdStrike’s sales have been booming. Free cash flow shows that it’s also very profitable. CrowdStrike is likely to keep growing quickly because the world is becoming more mobile and more devices are coming online all the time.
Network security providers
These providers seek to safeguard people, data, and applications within a network’s perimeter by limiting access privileges and duration in order to decrease overall information-security risk within the system.
Our pick
Splunk
Splunk (NASDAQ:SPLK), which has been a leader in data analytics for a long time, makes software that helps businesses sort through logs of information, keep track of digital activity, and plan how to respond to data breaches. Even though the company’s platform came out before cloud technology, it has been moving customers to newer versions of its software that run in the cloud.
But Splunk has many competitors, and some of them have software that is newer and more flexible for cloud computing needs today. However, because the company is still making the switch to cloud technology, Splunk is a value stock. This is especially true when you look at the company’s fundamentals, such as revenue and profit.
Defense and aerospace companies
As increased geopolitical concerns blur the barriers between cybersecurity and national defense, these corporations are increasingly integrating cybersecurity into their goods. This might increase the long-term investment opportunities for cybersecurity businesses, such as traditional defense contractors.
Our pick
Lockheed Martin
Lockheed Martin Lockheed Martin Corp. (NYSE: LMT), a security and aerospace company, is in charge of making advanced military planes and the technology they carry. Lockheed Martin is the largest defense contractor in the world. It works with a wide range of civil, defense, intelligence, and government clients. Most of what the company does is research, develop, and make technology products and systems, as well as offer technical and engineering services.
