Cybersecurity – technology exposure for defensive investors | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware

CIO has a neutral view on the global technology sector. We believe investors need to manage and reposition their exposure to capture the next group of potential winners from rapid developments in generative AI. The significant year-to-date rally in technology equities (with the NYSE FANG+ Index of leading US companies up 75.6%) also warrants potential rebalancing.

Beyond our preference for technology disruptors in AI and cloud, we also think defensive investors seeking to add to technology equities may consider cybersecurity as an alternative (or complement) to the highest-growth segments of technology:

In the near term, cybersecurity firms can benefit from the sector’s defensive growth profile. We expect corporate spending on cybersecurity to become less sensitive to the economic cycle. Rising numbers of global internet users, AI developments, and the growing number of interconnected devices increase the volume of data that needs protecting—and potential weaknesses for hackers to exploit.

More cyberattacks of increasing complexity raise the cost for firms that neglect cybersecurity—both reputationally and financially. According to IBM Security and Ponemon Institute’s “Cost of a Data Breach Report 2023,” the cost of a data breach continues to rise with the latest average cost at USD 4.45mn.

We therefore expect the industry’s average annual growth to be about 10% between 2020 and 2024 thanks to steadily higher enterprise IT spending and stronger adoption of cloud security. This should take the addressable market to USD 220bn by 2024, in our view. Spending on it has continued to grow at a high-single-digit rate, outstripping broader enterprise IT spending and insulating earnings in more challenging periods like the pandemic-driven slowdown of 2020.

Selective investments in cybersecurity can benefit from underinvestment and a fragmented market. Companies have not matched the cybersecurity threat with consistent spending to counteract it.

Even at current levels, security spending is less than 5% of overall technology spending (excluding smartphones), based on data from Gartner. We believe security should continue to gain a bigger share of the IT spending wallet, given the multitude of challenges faced by chief information security officers (CISOs).

But the twin forces of increased generative AI usage and a fragmented marketplace with ten different market segments suggest selective areas of the cybersecurity are set to benefit most.

Cloud security will likely be the fastest-growing segment, given that the penetration rate across key large segments, such as firewalls, remains relatively low. With the average enterprise using more than 50 security tools, comprehensive and cross-functional product providers may gain from consolidation efforts that reduce complexity, cut costs, and minimize overlooked vulnerabilities.

On balance, these trends mean cybersecurity platform leaders are better positioned for potential outperformance, even if they may not have the individual “best-of breed” components of more specialized security providers.

The investment opportunity is growing for firms that prevent breaches in the first place. Security professionals are increasingly focusing on the detection and remediation of breaches. This has led to more demand for security systems that can capture and analyze cybersecurity events, find new sources of attack, and isolate damage.

We therefore favor companies that are consolidators and capture significant amounts of data that can be monetized—either directly through provision of added services, or through improving the quality of existing products. However, we recommend selectivity in cybersecurity and prefer leading platform companies.

Please see “TechGPT: Select laggard opportunities in cybersecurity” (October 11, 2023) to find out more.


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National Cyber Security