The days of cybersecurity being portrayed as a cloak-and-dagger exercise are numbered as companies wake up to the very real threat of hacking, phishing and other malicious attacks. While the majority of tech stocks are being rotated in favour of value stocks, cybersecurity stocks are quietly improving their value propositions.
It’s been a hair-raising couple of months for tech investors. After receiving an indirect boost from the Federal Reserve’s emergency measures in 2020, tech stocks enjoyed the limelight: growth of the sector seemed the safest bet in a time of trouble – particularly as work-from-home conditions reigned supreme, unlike the hampered energy and retail sectors.
It was blue skies for tech as the market’s optimism reignited. COVID-19 infection rates finally showed signs of slowing, vaccine programs began rolling out and a further $1.9 trillion was pumped into the economy to reach a total of $4.1 trillion since March 2020.
Hell-bent on levelling up with China’s seemingly unstoppable tech policies, the US floated a potential $3 trillion spending plan. Made in China 2025 and China Standards 2035 are a clear and present danger to the US, touted as fast-tracks for the emerging superpower to make a shift to high end manufacturing and become a leading tech innovator.
Technology’s moment in the sun seems to have suddenly been cut short with a swing typical of market rotation. Headed up by the infamous GameStop short at the end of January, value stocks have taken some of the shine off the growth proposition of the sector. As the market continues to recover and we head into a period of reflation, it’s likely that value stocks, rather than the tech darlings, will benefit.
However – not all tech stocks are created equal. The excitingly underestimated cybersecurity sector is poised to flourish. Cybercrime is expected to rack up a bill of $10.5 trillion by 2025 as 5G technology increases the bandwidth of IoT and mobile devices. The threat is real, and if not taken seriously, will cost companies their customers, hard won reputations and lengthy lawsuits.
The statistics back up the theory: phishing scams are up 27% year-on-year, malware attacks are costing victims an average of $2.5 million in damages, data breaches are pegged at costing a cool $4 million and ransomware takes the crown, tallying an estimated $20 billion worth of chaos in 2021 – that’s 57x higher than in 2015.
The cybersecurity niche is one to watch. When the Nasdaq CTA Cybersecurity Index pulled back in March because of the broader sell-off of tech and other growth stocks, an opportunity was created for savvy investors to snap up the discounts. More than 60% of the cybersecurity players are considered to be underperforming, but are expected to be thrust into the spotlight as governments and corporations realise the consequences of not boosting digital spending.
Cybersecurity stocks are quietly increasing their value propositions, with companies such as Okta Inc taking the lead. This San Francisco-based platform appears to be a solid pick for its B2B digital identity authentication and compatibility with third party enterprises. As most companies are expected to ramp up their cybersecurity spending in the next two years, Okta Inc will be well-placed to capitalise on the market shift.
An attractive alternative to picking and choosing cybersecurity stocks is investing in an ETF with a cybersecurity focus. This provides a safer path through the potentially risky trajectory typical of fast-evolving market sectors with diversification across the sector.