In recent years, the world has become increasingly digitized, and this trend has only been accelerated by the COVID-19 pandemic, newer technologies such as artificial intelligence (AI) and machine learning, and the rise of remote work. As a result, the need for cybersecurity has become more critical than ever, and companies that specialize in providing cybersecurity and cloud-based solutions have become an essential part of the technology landscape. Some cybersecurity stocks have seen tremendous growth, with many investors looking to capitalize on this emerging trend. However, investing in cybersecurity stocks requires careful consideration and research to ensure that you make informed decisions. In this article, we will explore the cybersecurity industry, examples of popular cybersecurity stocks, and key factors to consider when investing in the cybersecurity space.
Cybersecurity Investing 101: How to invest in Cybersecurity stocks
Table of Contents
Key Takeaways:
Some investors have been drawn to cybersecurity stocks due to potential for growth, diversification, and innovation
Investing in cybersecurity stocks can come with risks that investors should consider,such as high valuations, intense competition, technological obsolescence, regulatory risks, and cybersecurity risks
Services like Public Premium give you access to advanced data and insights that are helpful when conducting fundamental analysis.
The cybersecurity value chain includes companies that develop, manufacture, and distribute cybersecurity hardware and software products, as well as provide consulting and managed security services to businesses and organizations.
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What are cybersecurity stocks?
Cybersecurity stocks represent companies that provide hardware and software products, consulting services, and managed security services designed to protect computer systems, networks, and data from cyber threats and cybercrime. These companies operate in a rapidly growing industry that has seen increased demand for cybersecurity solutions due to the proliferation of cyber attacks and the rising awareness of their potential impact on businesses and individuals including data breaches.
Examples of cybersecurity stocks include more established companies such as Palo Alto Networks (PANW), SentinelOne (S), Fortinet (FTNT), Cisco Systems (CSCO), CyberArk Software (CYBR), FireEye Inc. (FEYE), as well as newer players in the industry such as CrowdStrike Holdings (CRWD), Zscaler (ZS), and Okta. These companies in addition to tech companies like Microsoft, (MSFT), offer a range of cybersecurity solutions including firewalls, intrusion detection and prevention systems, cloud security services, identity and access management solutions, and threat intelligence platforms. As more businesses and organizations adopt digital technologies and rely on online communication, cloud computing, and data storage, the demand for cybersecurity solutions is likely to continue to grow. This is supported by recent research including a report by MarketsandMarkets, which projects that the global cyber security market size will reach $266.2 billion by 2027.
Benefits to consider when buying cybersecurity stocks
Investing in cybersecurity stocks can offer several benefits, including:
Growing Demand: With the increasing use of technology in our daily lives, the need for cybersecurity solutions has grown substantially. As cyber-attacks become more prevalent, cybersecurity companies have become essential in protecting businesses and individuals from threats. This trend is expected to continue, making cybersecurity stocks a potentially lucrative investment.
Market Growth: The cybersecurity market is expected to grow at a rapid pace, driven by increasing awareness of cyber threats and the need for robust security solutions. According to a report by MarketsandMarkets, the global cybersecurity market size is expected to reach $248.26 billion by 2023, growing at a CAGR of 10.2% from 2018 to 2023.
Diversification: Investing in cybersecurity stocks can help diversify your portfolio and reduce overall risk. Some investors interested in tech add cybersecurity to provide exposure to companies that stand to benefit from an increasingly digitized world.
Innovation: The cybersecurity industry is continually evolving, with companies investing heavily in research and development to try to stay ahead of new and emerging threats. Investing in cybersecurity and tech stocks has the potential to provide exposure to innovative companies that are at the forefront of developing new and more effective cybersecurity solutions.
Mergers and Acquisitions: The cybersecurity industry has seen a lot of merger and acquisition activity, with larger companies acquiring smaller ones to expand their offerings or gain access to new technologies. This trend has the potential to create opportunities for investors to profit from potential acquisition targets.
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Limitations to consider when buying cybersecurity stocks
While investing in cybersecurity stocks can be beneficial, there are also some potential drawbacks to consider, including:
High Valuations: Many cybersecurity stocks trade at high valuations due to the sector’s growth potential. This can make them vulnerable to sharp price corrections if market sentiment changes or if the company fails to deliver on growth expectations
Intense Competition: The cybersecurity industry is highly competitive, with many companies vying for market share. This competition can result in price wars and eroding profit margins, making it more challenging for companies to maintain growth rates.
Technological Obsolescence: The fast-paced nature of the cybersecurity industry means that companies need to continually innovate to stay ahead of threats. However, this can also mean that technologies can become obsolete quickly, and companies that fail to keep up can lose market share.
Regulatory Risks: The cybersecurity industry is subject to regulatory risks, with governments and regulatory bodies imposing new requirements and regulations on companies to protect consumer data and privacy. Compliance with these regulations can be costly and time-consuming, affecting companies’ profitability.
Cybersecurity Risks: Lastly, investing in cybersecurity stocks means investing in companies that are themselves vulnerable to cyber threats. If a company experiences a significant breach or cyberattack, this can negatively impact its financial performance and share price
Cybersecurity stocks: Bull and bear cases
Cybersecurity industry bulls, or advocates, point to the benefits of these stocks. More specifically, they cite factors including growing demand, increased spending, by the part of both businesses and governments, diversification, technological advancements and an uptick in mergers and acquisitions to back their positive look on the industry. Additionally, bulls also argue that an increasingly strict regulatory environment has the potential to benefit companies that provide compliance solutions and services.
Cybersecurity industry bears, on the other hand, cite saturation, limited budgets, cybersecurity fatigue and regulatory risks as contributing factors to a lack of opportunities for value investors. Finally, some bears argue that investing in cybersecurity stocks exposes investors to the same risks as the companies themselves, such as cybersecurity breaches and other cybersecurity-related risks.
Where to research cybersecurity stocks
Investors can research cybersecurity stocks on various financial websites such as Yahoo Finance, MarketWatch, and CNBC, which provide the latest market news, trends, and analysis related to the cybersecurity industry. There are also dedicated websites and online communities that specialize in covering the cybersecurity sector, such as Cybersecurity Ventures, SecurityWeek, and Dark Reading. Investors can also explore investment research platforms such as Public, Morningstar, Zacks, and Seeking Alpha, which offer detailed financial data, analyst ratings, and performance metrics for cybersecurity companies. Consulting with a financial advisor or a broker can also provide valuable insights and guidance on investing in cybersecurity stocks.
How to invest in cybersecurity stocks
There are two primary ways investors can Invest in cybersecurity stocks. First, they can research and purchase individual cybersecurity stocks traded on the NYSE that they believe have strong potential for growth and profitability.
The following are some general steps for investing in cybersecurity stocks:
Research the cybersecurity industry and available cybersecurity stocks taking factors such as earnings per share (EPS) into consideration.
Determine your investment goals, risk tolerance, and budget.
Choose a brokerage platform, Public as one example, to buy and sell stocks.
Open a brokerage account and fund it.
Select specific cybersecurity stocks to invest in based on your research and analysis.
Place buy orders for the chosen stocks and monitor their performance
Periodically review your portfolio and make adjustments as needed based on market conditions and changes in your investment goals
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Second, investors can also invest in mutual funds, such as T. Rowe Price Global Technology Fund or Fidelity Select Cybersecurity Portfolio, or exchange-traded funds (ETFs) that include a diversified portfolio of cybersecurity stocks. Some examples of ETFs including cybersecurity stocks include First Trust Nasdaq Cybersecurity ETF (CIBR), Global X Cybersecurity ETF (BUG), iShares Cybersecurity and Tech ETF (IHAK), ETFMG Prime Cyber Security ETF (HACK) and Invesco WilderHill Clean Energy ETF (PBW), Fidelity MSCI Information Technology Index ETF (FTEC), iShares Global Tech ETF (IXN), First Trust NASDAQ Technology Dividend Index Fund (TDIV), and iShares Cybersecurity and Tech ETF (IHAK). These ETFs have the potential to expose investors to a diverse portfolio of cybersecurity stocks, which can help reduce the risk of investing in individual stocks. Additionally, they can provide the convenience of investing in the cybersecurity industry through a single trade.
Finally, a thorough understanding of the cybersecurity stock value chain is a good starting point for investors who are interested in investing in cybersecurity stocks or any aforementioned ETFs. The cybersecurity stock value chain includes several components, such as hardware and software providers, cybersecurity services providers, and end-users. The hardware and software providers develop and manufacture cybersecurity products that are then used by the cybersecurity services providers to offer their services to end-users. End-users include individuals, businesses, and government organizations who buy and use cybersecurity products and services to protect their digital assets from cyber threats. Investors can consider investing in different components of the cybersecurity value chain based on their investment objectives and risk tolerance.
Overall, investing in cybersecurity stocks comes with risks that investors should consider, such as high valuations, intense competition, technological obsolescence, regulatory risks, and cybersecurity risks. However, with careful research and consideration, investors can mitigate these risks and potentially benefit from the growth opportunities presented by the cybersecurity industry while diversifying their portfolio.
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FAQs
What are cybersecurity stocks?
Cybersecurity stocks are shares of companies that provide products and services designed to protect computer systems, networks, and data from unauthorized access, theft, and damage by cybercriminals and other online threats.
How big is the cybersecurity industry?
The global cybersecurity market is anticipated to grow from an estimated USD 173.5 billion in 2022 to $266.2 billion by 2027, at a CAGR of 8.9%, according to a report by MarketsandMarkets. Overall, the industry is being driven by factors including the increase in target-based cyberattacks causing operational disruptions, the growing popularity of Cybersecurity Mesh Architecture (CSMA) approaches, and the rising demand for cyber-savvy boards.
What are some components of the cybersecurity stock value chain?
The cybersecurity stock value chain includes companies that develop, manufacture, and distribute cybersecurity hardware and software products, as well as provide consulting and managed security services to businesses and organizations seeking to protect their computer systems, networks, and data from cyber threats.
Where can I find/buy cybersecurity stocks?
You can buy cybersecurity stocks and cybersecurity ETFs through a brokerage account, which can be opened with an online broker, such as Public, or a traditional investment firm that offers access to the stock market
How can I find and invest in cybersecurity ETFs?
To find and invest in cybersecurity ETFs, you can start by searching for ETFs that track the performance of the cybersecurity industry, such as the First Trust NASDAQ Cybersecurity ETF or the ETFMG Prime Cyber Security ETF. You can invest in these ETFs through a brokerage account or a robo-advisor that offers access to the stock market.
Are cybersecurity stocks a good investment?
Cybersecurity stocks, for certain investors, can be considered a good investment due to their ability to offer investors exposure to companies that stand to benefit from an increasingly digitized world. There are uncertainties and risks to consider when investing in cybersecurity stocks including high valuations, competition, and regulatory risks amongst others. Whether or not cybersecurity stocks are a good investment depends on individual circumstances, investment goals, and risk tolerance.