Investment strategiesThematic investing: Cybersecurity investment opportunities

Cybersecurity plays a central role in enabling secure digitization of the world economy. With the digital economy growing to trillions of dollars, online attacks are extremely expensive for consumers and businesses alike. The pandemic further accelerated foundational technology adoption such as the cloud, expanded the installed device base and increased data generation — straining existing systems and exposing digital defense gaps.

The cyber-attack landscape remains quite complicated. Ransomware, malware and supply chain attacks represent major threats to global manufacturers and businesses. As digitization continues across the public and private sectors, cyber threats are likely to increase in intensity over the next five years, driving a strong and prolonged spending cycle for digital security solutions. Persistent growth drivers and increasing costs of cyber threats should allow the broader cyber market to grow at a faster pace than the overall economy.

Security companies’ earnings streams stand to benefit from positive fundamental support — even during a broad economic slowdown.

Cybersecurity investing opportunities

Globally, governments, businesses and consumers spent nearly $170 billion on cybersecurity solutions in 2022, with analysts forecasting spending to increase more than 11% to approximately $188 billion in 2023. Nearly 42% of cybersecurity spending was directed to security services.¹

The wide range of solutions necessary to protect an average enterprise has led to an extremely fragmented cybersecurity market. The pandemic surfaced additional digital security needs such as work-from-home, leading to increasingly specific and niche segments and subsegments within the broader cybersecurity market. Certain subsets within the cybersecurity industry with strong growth drivers include:

• Application security: Software applications used by employees need to be secured from attacks, sniffing attempts and other intrusions. In the meantime, remote access and shared data create additional opportunities for bad actors to permeate and breach access.
• Cloud security: With the explosion in adoption of cloud services, the need for specialized security solutions have surfaced, including cloud information writing, file access and workload migration.
• Data security: Digitization growth is strongly correlated with the broad increase in data assets corporations aggregate. Safeguarding information is extremely critical for modern business success, and breaches can lead to financial losses and damage customer confidence.
• Identity access management: With the popularity of remote work, large enterprises are managing complex access management needs, especially as the technology functions continue to disperse across multiple vendors with limited cross functionalities. Spending on universal access management systems remains a key priority for firms’ technology budgets.

Anticipating increased spend on cybersecurity

Overall, strong momentum in end-market demand continues to translate into robust fundamentals for cybersecurity companies. As digitization continues to evolve and expand, global businesses’ cybersecurity needs will also evolve and expand. Hybrid work remains popular and appears to be standard practice for many businesses going forward. Even if workers are largely back in the office, employees expect to be able to work from anywhere as they travel, take vacations and work from home. This increases the surface area that enterprises must defend, requiring investment in specialized solutions.

Corporations will likely respond by increasing cybersecurity spending. In addition to corporate demand, government demand is also shaping up to be a strong catalyst. The combination of corporate and government spending on cybersecurity provides a strong tailwind, supporting companies in this industry.

Moreover, most cybersecurity companies employ a subscription business model known as software as a service (SaaS). This model provides a recurring revenue stream, increasing predictability and resilience to these businesses. It also translates into lower overall costs and improved customer relationship stickiness. Some of the fastest growing cybersecurity vendors have high net retention rates relative to the broader enterprise software cohort, highlighting the incremental value existing customers continue derive from these services.²

Preparing for the future

Security challenges continue to receive heightened scrutiny from policy makers, business leaders, and consumers. And, since digital threats show little correlation to macroeconomic conditions, cybersecurity spending retains recession-resistant characteristics.

Meanwhile, digitization continues to expand the digital surface area companies must defend, providing positive fundamental support for cyber companies’ growth outlooks.

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