Cyberattacks are growing in scope and complexity… how it’s fueling the “inevitable” trend of cybersecurity… a handful of related investments to consider today
Cyberattacks are getting more expensive.
Back in May, Colonial Pipeline was hit with a devastating cyberattack that forced a shut-down of approximately 5,500 miles of pipeline, crippling gas delivery systems in the southeast.
Colonial reportedly paid about $5 million in bitcoin to end the attack.
That $5 million now looks like chump change.
Just days ago, hackers demanded $70 million to restore data they’re holding ransom in what’s being called a “colossal” ransomware attack that infected thousands of victims in at least 17 countries.
The hackers are believed to be the Russia-linked group, REvil, that is considered among the world’s most active and dangerous cybercriminal organizations.
From Fox Business:
The gang broke into Kaseya, a Miami-based information technology firm, and used their access to breach some of its clients’ clients, setting off a chain reaction that quickly paralyzed the computers of hundreds of firms worldwide.
Over the past several years, not only have the number of attacks grown significantly, the sophistication of those attacks has grown more advanced. And more dangerously, the targets are changing.
Here’s CNBC on the scope of this problem:
Since 2018, targets of hackers have been shifting from large companies with rich data, such as banks and retailers, to companies that are less armed against cyber-attacks but more essential to people’s daily lives. Globally, new victims of cyber-attacks are increasingly concentrated in the public sector and infrastructures…
The 2020 World Economic Forum’s Global Risks Report listed cyber-attacks on critical infrastructure as a top concern.
This was reinforced by the increasingly frequent cybersecurity incidents of 2021. UK-based cyber risk and privacy management solutions provider IT Governance tracked public information and discovered 143 incidents that resulted in over 1 billion breached records in April.
In the first quarter of 2021, there were 351 security incidents, accounting for over 3 billion breached records. This represents a 50% increase from the same period of last year.
Though we wish cyberattacks could be completely eliminated, that’s not a reality.
Over the coming decade, as our lives grow increasingly intertwined with all things “tech,” criminals will find new ways to use our technological tools against us – one example being “deepfakes” which we profiled here.
And while that’s bad for the general public, it does mean there’s a parallel trend we can profit from – cybersecurity.
In fact, we’d go so far as saying that growth in the cybersecurity sector is guaranteed.
In past Digests, we’ve used the term “inevitable” to describe this dynamic. An “inevitable” is a trend that’s so powerful and entrenched, that massive growth from future demand is, well, inevitable.
And that’s exactly what we find today with cyberattacks and the resulting need for cybersecurity.
***The silver lining in the growth of cyberattacks
As our world deals with cyberthreats, it is fueling a tidal wave of dollars flowing toward top-shelf cybersecurity companies.
It was back in September of last year that our macro specialist, Eric Fry, spotlighted this for his Investment Report subscribers:
Globally, countries and corporations spent about $159 billion on cybersecurity last year.
But that number is on track to soar to $270 billion per year by 2026, according to the research firm Gartner.
That’s because cyber threats are growing by the day.
Given this “inevitable” problem (and opportunity), Eric recommended the ETF, HACK, for subscribers.
HACK holds many of the top names in cybersecurity – Cisco, Palo Alto, Fortinet, and FireEye, for example.
Below, you can see it climbing 34% since last fall, when Eric recommended it.
HACK is a good conservative play on the entire sector. Meanwhile, if you’re looking for a more concentrated bet, you could consider the specific top-holdings within HACK that we just highlighted.
As one example, there’s Fortinet (FTNT). As you can see below, it’s up 67% on the year.
But a reminder to be cautious with valuations here.
As Fortinet has climbed this year, so too has its valuation. We can see this by looking at its price-to-earnings ratio (PE).
Last fall, FTNT’s PE clocked in as low as 41. Today, it has more than doubled, topping 84.
I’ll add that Eric has recommended another concentrated way to play cybersecurity. It’s up 21% since his recommendation back in March. And as to its valuation, after highlighting its expected earnings per share over the next two years, Eric writes:
At those levels of profitability, the stock would be selling for 18 times this year’s earnings and 14 times 2023 earnings.
Although these valuations would not qualify it as a “deep value” stock, they look quite cheap alongside the valuations of two leading cloud security companies: Zscaler Inc. (ZS) and Cloudflare Inc. (NET)…
Both Zscaler and Cloudfare trade for about 50 times revenue, which is 10 times greater than (Eric’s pick’s) price-to-sales ratio.
Out of respect for Eric’s subscribers, I won’t reveal the name. But you can click here to learn more as an Investment Report subscriber.
***Meanwhile, for cyberattack protection that’s a bit closer to home, consider Luke Lango’s pick
For newer Digest readers, Luke is our hypergrowth expert, and the analyst behind the Daily 10X Stock Report.
His specialty is finding market-leading tech innovators that are pioneering explosive trends, leading to huge returns for investors.
It was back in early December that Luke highlighted a cybersecurity company for his Daily 10X readers.
From Luke:
In today’s hyperconnected era, old-school email security platforms that protect just your email simply won’t cut it – and that’s why a $2.8 billion tech company by the name of Mimecast (MIME) has entirely reimagined email security systems.
Specifically, the company has developed what it calls an Email Security 3.0 platform which is an omni-channel, integrated, holistic email security ecosystem that protects enterprises from every single type of digital threat, regardless of where that threat originates.
It’s a breakthrough email security platform built for today’s hyperconnected world.
In his issue, Luke walks readers through all the architectural details of Mimecast’s Email Security 3.0, concluding with:
All in all, Mimecast’s novel Email Security 3.0 platform protects enterprises from all threats, all the time, everywhere.
It’s basically the best and most comprehensive email security system in the world.
Below, we look at MIME since Luke highlighted it back on December 4th. As you can see, despite exaggerated volatility in January, it’s up 20% since Luke’s issue.
Back to Luke:
This is a best-in-breed cybersecurity company in hypergrowth mode.
The good times won’t stop anytime soon.
With revenues expected to come in around $500 million this year, Mimecast is tapping into just 2% of its $23.8 billion addressable market in e-mail security… at the same time that holistic, omnichannel security solutions are becoming more important than ever… meaning big revenue growth is here to stay.
Plus, this is a hyperscalable software business with 70%-plus gross margins, and a long track record of positive operating leverage (EBITDA margins have gone from below 7% in 2016, to what should be above 20% this year, with room to run above 30% long-term).
Connecting the dots, it’s easy to see that Mimecast has all the necessary ingredients to be an enormous long-term winner.
To read Luke’s entire profile on Mimecast as a Daily 10X subscriber, click here.
Wrapping up, oftentimes we overcomplicate investing. At the end of the day, it can be simpler – find a trend that has decades of demand in front of it, then identify the market leaders. And as the most recent cyberattack from REvil illustrates, cybersecurity is, without doubt, such a long-legs trend.
If you’re looking for a no-brainer, “inevitable” investment theme today, it’s hard to beat this one.
Have a good evening,
Jeff Remsburg
