Why should I invest in cyber security?
The Facebook crisis has been a reminder of the potential attraction of an alternative approach to technology investments – investing in cyber security.
Cyber—related threats are ranked as higher threats by company chief executives than energy prices, asset bubbles, and fiscal crises, according to the American Banking Association. The cyber security industry is predicted to grow by 14% a year, to hit $1 trillion in 2021.
The sector gets a regular boost from high—profile cyber threats or meltdowns, from 2017’s Wannacry hacking attack across the globe (where malware scrambled files then demanded a payment to fix them) to the recent TSB banking meltdown.
Avast, a Prague—based cyber security firm which claims 435 million users, raised £600 million in a massive London initial public offering (IPO) in May 2018, prompting many investors to start doing some homework on the top cyber security stocks to invest in.
Cyber security ETFs to invest in
One shortcut to homework is a cyber security exchange traded fund (ETF) — such as the New York—listed PureFunds ISE Cyber Security ETF with the ticker HACK, or the London—listed Cyber Security Go ETF, which is tagged ISPY.
HACK, the first of a burgeoning ETF sector, tracks the Prime Cyber Defense Index, which is reconstituted and rebalanced four times a year to include companies worth at least $100 million, and gives a higher weighting to $600 million plus stocks. After launch at $25 in December 2014, this ETF rose to $33 in June 2015, but only regained that level in January 2018, showing how investors often get carried away with a new story.
Legal & General’s ISPY version however, has risen fairly steadily from £6.08 at launch in 2015 to over £10.00 in May 2018.
Other ETFs to investigate include the First Trust NASDAQ Cybersecurity ETF, and the Select Sector SPDR Technology ETF which, for instance, jumped 5.1% in April when the S&P 500 stock index gained only 2.2%.
Read more about how to master investment portfolio diversification in 2018
But when me—too companies in a fashionable sector can drag back returns from the proven big hitters, many investors prefer to dig out the gems for themselves.
The tech and defence giants are in cyber security, so you could benefit from their growth in this sphere by backing the big names: Alphabet (Google’s listed parent), IBM, Lockheed, Raytheon, Cisco or BAE Systems. All are investing in cyber security.
Or you could seek out the smaller specialists and high—rising hopefuls. Of our eight cyber security companies listed below, all (bar London—listed Sophos) are on the NASDAQ.
Eight cyber security firms worth considering for your portfolio
Floated at $17 six years ago, Splunk’s share price broke the $100 barrier in April 2018. When it listed, it had 4800 customers using its data analytics and security platform, but now has over 14,000, including 85% of the Fortune 100 companies. One big customer is Shazam, a music app bought by Apple for $400 million at the end of 2017. Splunk already generates positive cash flow and has a potentially lucrative capability in business analytics. (NASDAQ: SPLK)
2) Check Point Software Technologies
This is one of the big players in firewalls, a critical part of any business’s cyber security protection. It increased operating cash flow last year by 18% and earnings by 13%, has no debt and almost $4 billion of liquid assets. All—important subscription revenue jumped by 23% to $480 million, or 44% of its overall revenue — up from 15% five years ago. (NASDAQ:CHKP)
3) LogMeIn Inc
Another business with a subscription—based model, providing software as a service and ‘cloud—based remote connectivity services for collaboration, IT management and customer engagement’. Last year it made a transformative $2.9 billion acquisition, then paid $342 million for an add—on in February, and it now boasts one of the most comprehensive offerings in what used to be web conferencing but is now known as the UCC (Unified Communications & Collaboration) market. (NASDAQ:LOGM)
This company creates products and services to protect against advanced cyber threats, but it demonstrates the potential stock volatility in the sector. It was floated at $36 in 2013, jumped to $85 in 2014, and has been trading at under $20 since early 2016. In its last fiscal year it grew subscription revenues by 12%, gross profit margins by 2.3 points to 64.2% and cut its operating expenses by 16% or $146 million. That pushed it into positive cash flow, raising investor hopes of sustainable growth in the future. (NASDAQ: FEYE)
Headquartered in Oxford, UK, Sophos offers protection against a wide range of cyber threats, from ransomware to hacking, for customers (including Ford and the NHS) in 150 countries worldwide. Its shares regained momentum in April 2018 after the company said it was on track to deliver its goal of $1 billion of annual billings by March 2020, though mid—May saw the shares still 18% off their January 2018 high of £6.69. (LSE: SOPH)
Founded 15 years ago and based in London, Mimecast is focused on email and data security, protecting against spear—phishing, malware, data leaks, data loss, and downtime. In June 2017 it launched an app for its email archiving service, and since then the company has announced a workforce expansion in Australia and New Zealand. (NASDAQ:MIME)
7) CyberArk Software
Headquartered in Israel and Massachusetts, this company’s unique focus is on threats using insider privileges to attack an enterprise. A cornerstone of future growth could be its Privileged Account Management (PAM) product, which helps keep out undesirables from a company’s most important information and data. Analysts believe that use of PAM will rise to 75% of large enterprises (from 45%) within two years. (NASDAQ:CYBR)
Ranked 17 on the Cybersecurity 500 list (which includes private as well as public companies), Rapid7 allows companies to implement analytics—driven approaches to cyber security and IT operations. Floated at $25 in July 2015, the stock has regained that level only in 2018. (NASDAQ: RPD)