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2024 AI Investment - Cybersecurity
As mentioned in the previous article, AI PC may be an investment theme worth paying attention to in 2024.
However, analysts at Barclays believe that another area that may benefit from AI in 2024 is cybersecurity.
Perhaps some friends are not very familiar with cybersecurity stocks, so this article will introduce the development of the cybersecurity stock industry, the potential impact of AI on the industry, the leading companies in the industry, and how to invest.
What are cybersecurity stocks?
Cybersecurity provides defense measures for enterprise IT systems, including hardware, software, and consulting services.
Just as people get sick from virus infections, there are various viruses attempting to invade enterprise computers in the digital world, affecting their normal operation. In order to ensure that the enterprise can operate normally, some defense measures need to be taken, just like the need for specific cells in the body to resist and eliminate viruses.
Cybersecurity stocks are publicly listed companies that provide such services, helping to protect the security of enterprises' networks, systems, and data.
According to Fortune Business Insights, industries such as finance, retail, beverages, industry, and government all have a demand for cybersecurity. Looking at the industry ranking with the highest market share, the banking, financial services, and insurance (BFSI) industry ranks first, followed by government and medical industries.
Source: Fortune Business Insights
Why is cybersecurity stocks worth paying attention to? How big is the industry?
Cybersecurity stocks have been increasingly prominent in recent years, possibly due to the following two factors:
1. Acceleration of digitization
In recent years, the digitization process has accelerated, especially after experiencing the epidemic. The digital lifestyle has become increasingly integrated with people. Working from home has become the norm, video conferencing has replaced face-to-face communication, and many enterprises have migrated their operations to the cloud. Uploading and sharing photos and videos has become a daily necessity. As life fully enters the digital track, the demand for cybersecurity has also sharply increased.
2. Rise of AI
Artificial Intelligence (AI) is reshaping almost every industry, including cybersecurity. However, AI may be a double-edged sword for cybersecurity. On the one hand, more and more hackers are using AI to carry out cyber-attacks. On the other hand, cybersecurity companies are increasingly relying on AI to assist in detecting suspicious data and defending against hacker attacks. Overall, AI is more of a positive force for cybersecurity companies, such as more effectively identifying and preventing hacker attacks, and reducing enterprise IT costs.
Based on these two factors, many industry reports believe that the cybersecurity industry is rapidly developing, with significant potential scale.
According to the report from the Precedence Research institution, the global cybersecurity market is projected to reach $211.48 billion in 2022 and is expected to rise to $691.64 billion by 2032, with a compound annual growth rate of 12.58%.
In addition, there are reports that analyze the AI cybersecurity market separately. According to the report from Allied Market Research, the global AI cybersecurity market is projected to reach $19.2 billion in 2022 and is expected to rise to $154.8 billion by 2032, with an astonishing compound annual growth rate of 23.6%.
Source: Precedence Research
What are the characteristics of cybersecurity stocks?
Many cybersecurity stocks are software companies, and most software companies adopt the software-as-a-service (SaaS) business model.
Therefore, many cybersecurity stocks possess the characteristics of SaaS stocks. The most obvious financial characteristic of SaaS stocks is rapid company growth, but they may continue to operate at a loss or have a low profit margin. If valuing based on price-to-earnings (P/E) ratio, the stock price P/E valuations of these SaaS stocks are usually high, and some companies may still be operating at a loss. The reasons are as follows:
Growth prospects: SaaS companies drive revenue growth quickly by heavily investing in advertising to acquire new customers and expand market share. However, this can also lead to lower profits or even losses. Nevertheless, some investors believe that high growth rates can bring future profitability as the company gains more customers and expands its business scale.
Deferred revenue: SaaS companies typically utilize subscription-based models, which means that revenue is recognized as customers use the service over time. This may result in delayed revenue recognition, making the company's profits appear low or in a loss. Only when the user base reaches a certain level can profitability be achieved.
So you may often see that although some cybersecurity stocks are in a loss-making situation, their stock prices are very good, and one of the reasons is the above situation.
What are the leading companies in the cybersecurity industry?
In this industry full of opportunities, what are the leading companies?
According to Companiesmarketcap data, we have listed the top ten cybersecurity leading stocks by market cap and briefly introduced some of the top three leading companies, so that everyone can understand the key participants in the industry.
Data Source: Companies Market Cap Data as of January 26, 2024
Palo Alto Networks (PANW)
Palo Alto is a well-established cybersecurity company, established in 2005, headquartered in Santa Clara, California, USA.
It launched the first self-developed enterprise firewall in 2007 and has maintained a leading position in the enterprise firewall market. The company went public on the NYSE in 2012 and transferred to the Nasdaq market in October 2021.
In terms of revenue, Palo Alto is undoubtedly the industry leader. In the fiscal year 2023, Palo Alto's revenue reached $6.893 billion, a 25% year-on-year growth. In the past five fiscal years, four fiscal years saw Palo Alto's revenue growth rate exceed 20%, indicating its stable and rapid growth.
資料來源: Newmont Fourth Quarter and Full-Year 2023 Result
CrowdStrike (CRWD)
CrowdStrike is a rising star in the cybersecurity field, founded in 2011 and headquartered in Sunnyvale, California, USA. The company went public on the Nasdaq market in 2019.
Unlike traditional cybersecurity companies, CrowdStrike is dedicated to reshaping security in the cloud era. The company's most famous product is the security threat intelligence platform Falcon launched in 2012. In addition, in 2019, they also introduced the PaaS security platform CrowdStrike Store, creating a complete 'SaaS+PaaS' security ecosystem.
CrowdStrike has been involved in multiple high-profile malicious cyberattack response activities, gaining significant reputation, including the Sony Pictures hack incident and the 2016 'Trump-Russia' incident.
In the fiscal year 2023, CrowdStrike's revenue reached $2.241 billion, a 54% year-on-year growth. Although their revenue is lower than Palo Alto, CrowdStrike's revenue growth rate is faster. Over the past 5 fiscal years, their revenue growth rate has consistently remained above 50%; however, with the expansion in scale, the growth rate has also slowed down.
Data Source: Futubull
Fortinet (FTNT)
Fortinet is also a long-standing cybersecurity company, established in 2000 and headquartered in Sunnyvale, California.
The company not only provides software but also sells hardware to enhance the effectiveness of security measures.
Unlike Palo Alto and CrowdStrike, Fortinet emphasizes both profitability and growth potential, with stronger profitability than the aforementioned companies.
In the 2022 fiscal year, Fortinet achieved revenues of $4.417 billion, a year-on-year growth of 32%. Over the past two fiscal years, its revenue growth has been accelerating.
Source: Futubull
How to invest in cybersecurity stocks?
Of course, in addition to paying attention to leading stocks in the cybersecurity industry, you can also track ETFs that invest in cybersecurity stocks to understand the overall industry trend.
According to ETF Database, the following are the top five network security ETFs by asset size.
Source: ETF Database
Although these ETFs track network security stocks, their composition may differ due to different ETF methodologies, which will result in different trends.
In the past year (January 26, 2023 to January 26, 2024), WCBR has significantly outperformed the other four ETFs, with a growth rate of 57.7%, while the other four ETFs have growth rates of around 36% to 39%.
However, it should be noted that past performance is not the only indicator for evaluating ETFs. Other factors such as liquidity and fees need to be considered, and a comprehensive analysis of various factors is required. In addition, past performance does not guarantee future performance, so investment should be approached with caution to market risks.
Data source: Google finance. Data as of January 26, 2024
Potential risks of network security stocks:
Of course, any investment carries risks, and investing in network security stocks is no exception.
High valuation: Due to the growth potential of the industry, many cybersecurity stocks have high valuations. If market sentiment changes or companies fail to meet growth expectations, this may make them susceptible to significant price adjustments.
Intense competition: The cybersecurity industry is highly competitive, with many companies vying for market share. This competition can lead to price wars and erode profit margins, making it more challenging for companies to maintain growth rates.
Outdated technology: The fast-paced nature of the cybersecurity industry means that companies need to constantly innovate to stay ahead. However, this can also mean that technology quickly becomes outdated, and companies that fail to keep up with trends may lose market share.
High price volatility: Cybersecurity stocks are a type of technology stock, so their prices tend to be more volatile than blue chip stocks. For example, many cybersecurity stocks experienced significant pullbacks during the bear market in the US stock market in 2022.
In summary:
Cybersecurity companies listed on the stock market provide security measures for IT systems, including hardware, software, and consulting services.
The cybersecurity industry is large in scale and growing rapidly, mainly driven by the acceleration of digitization processes and AI.
Many cybersecurity stocks have the characteristics of SaaS stocks, characterized by rapid growth but lower profitability or losses. The reasons include low profitability due to advertising spending, revenue recognition delays, and the need to reach a certain user scale to become profitable.
The top three companies in the cybersecurity industry by market cap are Palo Alto Networks, CrowdStrike, and Fortinet.
The key to investing in cybersecurity stocks is to focus on industry leaders and track cybersecurity ETFs, but it is necessary to comprehensively consider past performance, liquidity, fees, and other indicators, and to handle market risks cautiously.
Potential risks of cybersecurity stocks: high valuations, intense competition, outdated technology, and large stock price fluctuations.
