It’s for good reason that cybersecurity companies aren’t actively covered in the Cabot Turnaround Letter, since few of them are faced with a genuine turnaround situation—and mainly owing to the categorical strength of the overall space.
That said, I think it’s worth bringing this industry to your attention since there appear to be some deep problems brewing on the cybersecurity front as it concerns the U.S. public and private sectors—problems that could serve as a bullish catalyst for not only the cybersecurity stocks, but for other areas of the market as well.
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To begin with, consider the industry-tracking Amplify Cybersecurity ETF (HACK), which is up over 30% since the early April market low (versus 20% in the S&P 500 index). Led by companies like Zscaler (ZS), CrowdStrike (CRWD) and CyberArk (CYBR), the cyber stocks are reflecting not only the accelerating adoption of AI in cybersecurity solutions but also an increasing threat environment.
Earlier this month, the Financial Times ran an essay entitled, “Cyber Crime is Surging. Will AI Make it Worse?” The article highlighted the rapid spread of problems like computer hacking, ransom and blackmail and other cyber-related threats. Putting aside the discussion of AI, the acknowledgment that cybercrime is becoming a greater problem across the entire spectrum of the private and public domains should be addressed.
There are rumors swirling that the federal government was comprehensively hacked by overseas cyber criminals (allegedly from China and Russia), resulting in massive quantities of data on U.S. citizens being stolen from multiple departments. Since I have no way of confirming the truth or falsity of these rumors, I must refrain from presuming them to be true. But given the growing number of news articles spotlighting major attacks against governments, corporations and individuals from malicious actors overseas, it’s hard to completely discount them.
A recent overview of the problem was provided by TechRadar Pro, which noted that Chinese hackers have been targeting companies worldwide for the past year, and they’ve managed to compromise at least 75 organizations, with some reports suggesting the actual number of victims could be much bigger.
The article further stated that, according to research from cyber firm Sentinel Labs (which conducted its own in-house investigation of the broader problem after itself suffering a cyberattack), the attacks are linked to three China-related actor collectives: APT15 (AKA Ke3Chang or Nylon Typhoon), UNC5174 and APT41.
Sentinel Labs said most of the victims are operating in the critical infrastructure areas of manufacturing, government, finance, telecommunications and research sectors. “This led the researchers to conclude that the attackers were most likely positioning for potential conflict, either cyber-related, or military,” the TechRadar article concluded.
Earlier this week, NextGov/FCW reported that, according to two U.S. security agencies, data center giant Digital Realty and mass media titan Comcast were likely victims of the Chinese cyberespionage group known as Salt Typhoon. The article reported that the hacker group is “part of a broader syndicate of state-backed groups tied to different military and intelligence arms of China’s central government.”
Even more recently, it was reported across several mainstream news outlets that United Natural Foods, a distributor for grocery store chain Whole Foods and other grocers (including more than 30,000 customer locations), suffered a cyber incident that caused temporary disruptions in its operations. The company “proactively” shut down some of its systems as part of its response to the event, which “temporarily impacted the company’s ability to fulfill and distribute customer orders,” according to an SEC filing.
This latest incident highlights the potential threat that cyberattacks pose to the nation’s critical supply chains. It also makes it easier to understand the extent to which cybersecurity stocks are outperforming of late.
In terms of turnaround within this industry, the only one I could find at present that remotely fits the bill is Allot (ALLT), a company that specializes in network intelligence and security solutions for service providers and enterprises. It has recently shifted its focus to cybersecurity with a Security-as-a-Service line of offerings.
The turnaround is advancing, however, as the firm has managed to secure major telecom clients and is now experiencing positive cash flow, suggesting it has reached an inflection point in its turnaround. However, the share price is still down 60% from its 2021 peak, and there is still evidence of stagnation in other parts of the business, so there’s still lots of room for improvement here. Overall, I think ALLT is a worthwhile opportunity for investors looking for a lower-priced opportunity with longer-term growth potential in the sector.
Company-specific turnarounds aside, the main takeaway from the cybersecurity sector strength is that there is likely more to the ongoing cyberthreat story than meets the eye. If the rumors concerning massive U.S. federal government data breaches turn out to be true, a number of industries stand to benefit from the subsequent leak-plugging and recovery operations, including IT services and system integrators—think Accenture (ACN), Booz Allen Hamilton (BAH) and Science Applications International (SAIC)—as well as cloud computing and data backup providers, consulting and risk management firms and perhaps even defense contractors (especially if national security systems are compromised).
All told, cybersecurity is an area I think we need to be keeping a weather eye on in the coming months.
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