Investing in Cybersecurity

Published on 10/29/21 | Saurav Sen | 2,324 Words

The BuyGist:

  • We’ve been wrestling with the idea of increasing our allocation to Cybersecurity.
  • While the “macro” indicators look good for this sub-theme (we lump it under AI & Big Data), do cybersecurity firms make good investments?
  • We dig into some of the usual suspects and decide on a new course of action.

As good as it gets

If you’ve been a regular reader of our investment research & ideas, you’ll know that we look for “inevitabilities”. Well, nothing in investing is inevitable. But the continued growth in Cybersecurity is about as inevitable as it gets in the world of investing.

We’re big believers in Thematic Investing – it’s our first step towards sleeping well at night. On the surface, Thematic Investing seems like “investing in hype” or “riding the wave” or “joining the bandwagon”. To us, however, it’s about Risk Management. The higher (somewhat theoretical) probability of a multi-decade growth trajectory directly means a lower (somewhat theoretical) probability of a multi-decade stagnant or declining headwind.

Cybersecurity, on the surface, sounds like another hype wave. But we think this sub-theme (we’ve lumped it under our AI & Big Data theme) has a very high probability of a multi-decade growth trajectory. This opinion is partly based on subjective reasoning and partly based on data on the ground.

The impending growth in Cybersecurity – as a societal need and, therefore, a business – is based on some self-evident truths that (ironically) don’t need hard data for confirmation:

  1. The volume of data is growing exponentially.
  2. Proliferation of Artificial Intelligence – the rise of self-programming applications – will accelerate over the next few years.
  3. Heterogenous Computing – anytime, anywhere computing – is becoming the norm.
  4. 5G is the most “softwarized” generation of cellular networks, which facilitates heterogenous computing.
  5. The Internet-of-Things (IoT) phenomenon hasn’t, well, become a phenomenon yet. But it would be unwise to bet against it.

But here’s some data anyway from Cybersecurity company Fortinet to support the worldview listed above:

  1. IDC believes there will be 55.7 billion connected devices by 2025, of which 75% will be connected to the IoT.
  2. July 2020 alone saw a 653% increase in malicious activity compared to the same month in 2019.
  3. More than 90% of healthcare organizations suffered at least one cybersecurity breach in the previous 3 years.
  4. The global Cybersecurity market was worth $176 billion in 2020. This firm thinks it will be worth $403 billion by 2027. That’s a 12.5% CAGR.
  5. Palo Alto, one of Fortinet’s main rivals, projects that the Cybersecurity market will grow by 14% per annum over the next 3 years.

The long and short of these lists is that significantly more confidential data and insights will be floating around in the airwaves and pipes; with anytime, anywhere computing, security will be needed…anywhere, anytime…against increasingly Intelligent (Naturally or Artificially) attackers.

Sounds like a slam dunk investment then! Not so fast. As SWAN Investorswe must make sure that we’re not just putting our hard-earned money into irrational exuberance. Just because something is inevitable, doesn’t necessarily make it a great investment – at least not one that helps us sleep well at night.

The rest of this article is about finding sleep-well-at-night Cybersecurity investments that don’t add Risk to our portfolio.

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