Cybersecurity: A Long-Term Growth Trend

by
Desmond Foo

With Q2 earnings season almost done and dusted, one subsector that fared well was cybersecurity with most leading cybersecurity companies beating analysts’ forecasts. The Nasdaq CTA Cybersecurity Index has outperformed other subsector peers since earnings season kicked off on 14 Jul. The cybersecurity space has witnessed exponential growth in recent times. According to the International Data Corporation, the global cybersecurity market is projected to grow 12% annually, from $210bn in 2023, to $300bn in 2026. What has contributed to its growth, and can it continue? We explore some key drivers below. 

Cybersecurity demand rocketed after Covid-induced lockdowns resulted in a shift towards remote work and cloud adoption. Since then, we’ve witnessed other tech-related trends such as cryptocurrencies and blockchain, the metaverse, 5G and generative AI. As the world becomes more technologically interconnected and dependent, the risk of cyberattacks rises as well. Cybersecurity is imperative in safeguarding digital assets and online systems.

Increasingly, cybersecurity is becoming a key component of regulatory compliance. Governments and regulatory bodies worldwide have introduced stringent data security and privacy regulations to safeguard individuals’ rights and sensitive information. Compliance with these regulations, such as GDPR in Europe, CCPA and HIPAA in the US, is not just a legal requirement but also a moral obligation for organizations.

Costs related to cybercrimes are rising too. According to IBM, cyber-attacks rose 38% yoy in 2022, with the average data breach costing a company ~$4.35 million. With much to lose, companies’ cybersecurity budgets have increased steadily. On a national level, the stakes are higher. A Google report showed cyberattacks on NATO member countries increased 300% yoy in 2022. Due to simmering geopolitical tensions, governments have beefed up cybersecurity spending with the aim of protecting critical infrastructure and sensitive classified information.  For 2024, the Biden administration is proposing a cybersecurity budget of $24 billion, a more than double increase from 2023.

Lastly, valuation metrics remain appealing. Compared to the broader Software & Services group, the ISE Cybersecurity Index trades at an attractive discount (>75%) in terms of price-to-sales (P/S) ratio. On a historical basis, its P/S of 1.69x is currently near an all-time low.  In conclusion, we think of cybersecurity as a structural investment theme, which warrants a long-term position in one’s asset allocation portfolio. The more entrenched in tech the world gets, the greater the need for cybersecurity.


Disclosures

The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.

This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Nasdaq CTA Cybersecurity Index is designed to track the performance of companies engaged in the Cybersecurity segment of the technology and industrial sectors. The Index includes companies primarily involved in the building, implementation and management of security protocols applied to private and public networks, computers and mobile devices in order to provide protection of the integrity of data and network operations.

The Nasdaq CTA Artificial Intelligence Index is designed to track the performance of companies engaged in the artificial intelligence segment of the technology, industrial, medical and other economic sectors. The Index includes companies in artificial intelligence that are classified as either enablers, engagers or enhancers.

The Nasdaq CTA Artificial Intelligence and Robotics Index is designed to track the performance of companies engaged in the artificial intelligence and robotics segment of the technology, industrial, medical and other economic sectors. The Index includes companies in artificial intelligence or robotics that are classified as either enablers, engagers or enhancers.

The ISE CTA Cloud Computing Index is designed to track the performance of companies actively involved in the cloud computing industry.

The Nasdaq CTA Internet Index is designed to track the performance of a set of companies engaged in internet-related businesses.

The Nasdaq CTA Global Semiconductor Index is designed to track the performance of a set of international companies engaged in semiconductor-related businesses.

The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.

The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

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