For all the impact COVID has had on the stock market, the cybersecurity industry has gone from strength to strength as it's helped businesses defend against cyber criminals attempting to take advantage of the havoc caused by the pandemic.
The move to working from home, beyond the safety of the office walls and traditional network perimeter, has forced many businesses to rethink their approach to cybersecurity. Particularly their vulnerability to potentially devastating phishing and ransomware attacks.
Bad actors were quick to take advantage of COVID's disruption, with cyberattacks significantly increasing in both frequency and severity with the onset of the pandemic. Globally, the annual cost of cybercrime is expected to hit US$6 trillion in 2021, having doubled since 2015.
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Cyber disruptions pose much more of a threat to society than just the financial impact, such as attacks crippling critical infrastructure like hospitals and public utilities. In response, US president Joe Biden is marshalling a "whole-of-nation" effort to confront cyber threats and modernise defences.
Locally, Australia has experienced a 60 per cent jump in ransomware attacks in the past 12 months, according to the Australian Cyber Security Centre. Meanwhile, the number of phishing attacks rose 75 per cent in 2020, according to the Australian Competition and Consumer Commission's Scamwatch.
Responding to the threat, half of large enterprises – with more than 10,000 employees – now spend at least US$1 million annually on security. Another 43 per cent of large enterprises spend at least US$250,000 annually, while only 7 per cent spend less than this.
Businesses of all sizes are more aware than ever that they must protect themselves from cyberattacks, which ultimately is driving demand for high-end protection.
This trend is resonating in the share price movements we have seen from key cybersecurity providers over the past year, clearly outperforming the benchmark S&P 500 index. Their growth will remain elevated as we see businesses allocating more capital each year to cybersecurity.
Cybersecurity stocks to watch
Many cybersecurity companies are still in their infancy, meaning they lack profitability. Their focus is on spending to innovate and acquire new customers.
Cybersecurity company valuations are high, with elevated expectations for providers such as CrowdStrike (NASDAQ: CRWD) – one of the biggest cybersecurity companies in the world, known for endpoint security. However, there is continued scope for growth amid the current environment, and this will ultimately support gains across stocks such as CrowdStrike. Its shares have climbed almost 30 per cent over the past year.
Crowdstrike's Falcon Pro for Mac won a fourth consecutive Approved Security Product award from leading independent testing organisation AV-Comparatives. The company's impressive pace of cybersecurity innovation has helped it grow a loyal subscriber base, with Annual Recurring Revenue (ARR) climbing 70 per cent year on year.
CrowdStrike's customer base expanded more than 80 per cent last year, a pace that it can sustain amid a heightened cyber-threat environment. Additionally, many companies are likely to shift aggressively to CrowdStrike's style of cloud-based endpoint security, replacing previous solutions.
CyberArk Software (NASDAQ: CYBR) is one of the few cybersecurity companies that focuses on securing privileged accounts within organisations. Such protection is critical, as privileged accounts are targeted by hackers, because such accounts tend to have access to more sensitive systems and data.
CyberArk Software counts more than half of Fortune 500 companies as customers. The company’s total revenue grew by 10 per cent year on year in its Q2 earnings. Its ARR was US$315 million – an increase of 35 per cent year on year. Its shares have also climbed 12.74 per cent for the year to date.
SentinelOne (NYSE: S) is another to watch, even though the company is still not profitable with its focus on spending cash to grow the business. Publicly listed in June 2021, its shares have climbed 70 per cent for the year to date.
SentinelOne's total revenue reached US$45.8 million in Q2, 2021, up 121 per cent year on year. Its total customer count grew more than 75 per cent year on year, while customers with over US$100,000 ARR grew 140 per cent.
Palo Alto Networks (NYSE: PANW) describes itself as a “next-generation security company” and offers sophisticated firewalls and cloud-based solutions. It has a solid reputation in the cybersecurity industry and in Q2, 2021 earnings, it signed 18 customers with eight-figure transactions.
Serving more than 85 of Fortune 100 companies, Palo Alto Networks' revenues grew by 28 per cent year on year to USD$1.2 billion. Its shares have climbed 42.9 per cent for the year to date.
Meanwhile, Cloudflare (NYSE: NET) saw second-quarter total revenue of US$152.4 million, representing an increase of 53 per cent year on year. It has more than 126,000 paying customers, including 19 per cent of Fortune 1,000. Analysts believe Cloudflare can gain further market share in the next five years from big names such as Cisco.
The bottom line is that the cybersecurity industry has developed to become a must-have for every business. This provides cyber companies with a huge addressable market and higher spend from current customers if threats continue, and there is no sign of them abating.
Stock valuations are elevated but, with the industry growing at such a rapid pace, cyber companies will continue to see higher earnings year on year for the foreseeable future.
Josh Gilbert is a market analyst at eToro