It’s becoming increasingly clear that it’s time to invest in cybersecurity. Here are the two best ways to do it.
The massive cyberattack that hit the U.S. government and big tech recently highlights the importance of storing and protecting data - and is one more reason to invest in cybersecurity.
Not too long ago, critical information like employee health records and company financial statements were stored in long rows of file cabinets or boxes sitting in musty warehouses.
Then came computers and the internet, and the data was stored digitally. Data storage has exploded over the past several decades and is growing exponentially because of the emergence of new digital technologies.
As the world becomes digitized, protecting valuable and sensitive data is essential. As more valuable data is created, cybercriminals become increasingly motivated to steal the data and sell the data. A single cybersecurity company can block over 100 million threats per day. That’s equivalent to more than one thousand threats blocked every second. But all it takes is one breach to cause severe damage for companies and users.
For example, in 2013-14, Yahoo had all 3 billion of its accounts hacked in two separate attacks, arguably the worst data breaches of the 21st century. In 2017, Equifax, one of the largest credit bureaus in America, announced a data breach that affected 143 million consumers, including social security numbers, birth dates and driver’s license numbers. In late 2018, Marriott International announced a data breach that compromised 500 million accounts, including personal information like passport numbers.
Hackers sponsored by foreign governments such as China or Russia account for about 23% of global breaches while organized crime accounts for another 39% of data thefts.
Soaring Spending on Cybersecurity
Cybersecurity is one of the fastest-growing segments of IT spending. Chief Information Officers consistently rank cybersecurity as their top spending priority.
In 2019, the average total cost of a data breach for a company was $3.9 million, with 36% of the cost coming from the loss of customer trust. Damages from cybercrime could cost the world $6 trillion annually by 2021 (next year!), prompting individuals, companies, and governments to spend a bundle with cybersecurity firms to provide sophisticated software and services to protect proprietary data.
Cybersecurity will be a powerful theme in 2021 that will be further fueled by the growth of new technologies that offer connectivity to data, such as machine learning, cloud computing, and the internet of things (IoT).
Now, using my trademark “shotgun and rifle” strategy of combining an ETF with a specific stock pick, let’s take a look at how you can profit from this cybersecurity theme.
2 Ways to Invest in Cybersecurity
An aggressive cybersecurity play for 2021 is Cloudflare, Inc. (NET). This company went public through an IPO last year and got its start offering internet security and website performance services. The decade-old company is growing fast and appears to be gaining market share. NET has high gross margins and some analysts expect its revenue to double by 2022.
This off-the radar company and potential takeover target engages provides cloud-based services to secure websites. It offers various products for performance and reliability, video streaming and delivery, advanced security, insights, Cloudflare for developers, domain registration and Cloudflare marketplace.
With many companies requiring employees to work from home, that has put a strain on security. Cloudflare has helped companies deal with hardships imposed by the pandemic, even making its product to support remote work free for small businesses through this past August. Cloudflare has a strategic agreement with Baidu (BIDU), which should only help growth.
NET stock is growing quite fast: it’s up a whopping 387% in 2020! It may be due for a pullback, though it did just weather a fairly sharp retreat (-15%) in the second half of October.
A broader, more conservative cyber play is the Global X Cybersecurity ETF (BUG), a basket of cybersecurity stocks of companies developing and managing security protocols to prevent intrusion and attacks on systems, networks, applications, computers and mobile devices.
This ETF has 29 holdings and the top 10 stocks represent roughly 60% of the total market value of the basket. Seventy-four percent of the companies are incorporated in America, followed by 13% in Israel and 8% in Japan.
Year to date, BUG is up 76%, and has been on a tear in the last two weeks.
Put these two cybersecurity plays in your portfolio to profit from this enduring megatrend – in 2021 and beyond.