How Cybersecurity Companies Are Benefiting from Generative AI Abusers

Key takeaways

Generative AI can be used to enhance the performance of cybersecurity products, streamline operations, and reduce costs.

Companies such as Zscaler, Crowdstrike, Darktrace, and SentinelOne are all incorporating generative AI into their offerings which suggests that the cybersecurity sector is well-positioned to benefit from its disruption.

Despite resilient financial performance, the cybersecurity sector has not yet fully recovered from the wider tech sell-off last year, suggesting an attractive investment opportunity.

Until recently, the concept of generative AI was the stuff of sci-fi films.

But through machine learning, applications like Chat GPT are making us more efficient in many ways. Moreover, the number of sectors such technology stands to revolutionise is only growing as capabilities widen and user numbers proliferate.

As with any disruptive trend, the movement is creating many interesting investment opportunities. Right now, though, we see one particular, underappreciated way of capitalising on the generative AI boom.

New opportunities

New technology always creates new digital threats, and generative AI is no exception. Bad actors wield it to launch everything from AI-powered malware to deepfakes and phishing emails.

But this has a flip side. While new technology invariably creates threat potential, it also creates opportunity. The question then is, does the opportunity outweigh the threat potential? In the cybersecurity sector, we believe it does.

According to McKinsey, the total vended market for cybersecurity companies is currently between $USD 140 billion and $USD 150 billion. However, the total addressable market is thought to be anywhere from $USD 1.5 trillion to $USD 2 trillion.¹

In other words, cybersecurity companies are only currently penetrating about 10% of the global cybersecurity market opportunity.²

Why? The root cause is an inability to meet customer needs fully in terms of automation, pricing, and services. But generative AI, used for good, can help to bridge this gap by:

- Enhancing the overall performance of cybersecurity products – equipping companies with advanced tools for better and more proactive threat detection and response;
- Streamlining individual company operations through the automation of repetitive tasks;
- Driving a stronger bottom line by reducing operational costs, levelling up more junior (and new) employees faster, and thereby improving profit margins.

The list goes on, but the end-result is that generative AI has the potential to unlock considerable (currently) unrealised value for cybersecurity companies.

One step ahead

Indeed, a number of cybersecurity companies saw the rise of AI coming. Where many ordinary citizens have been caught by surprise, these companies have for a while now been embracing machine learning technology across the board.

Take Zscaler, for example, which recently introduced its suite of generative AI solutions designed to enhance threat detection, prevention, and response.³

Likewise, Crowdstrike recently announced its generative AI platform called CharlotteAI, which helps users of all skillsets improve their ability to stop cybersecurity breaches.⁴

Many more examples exist, with firms like Darktrace⁵ and SentinelOne⁶ also incorporating generative AI into their offerings.

Yet, despite resilient strong financial performance year to date, the cybersecurity sector looks under-appreciated and as a result, relatively cheap versus other tech sectors that have materially recovered after last year’s wider tech sell off.

In our Cybersecurity and Data Privacy basket of stocks, the Q2 2023 Earnings Season saw 89% of companies delivering positives sales growth, with more than half beating analyst expectations. A further 74% delivered positive earnings growth with 80% outperforming analyst forecasts.⁷

If we look at the chart below, we can see that the leading P/E ratio for our Cybersecurity and Data Privacy basket of stocks has fallen considerably over the past year. As of June 23, it sat one standard deviation below the mean.

The leading P/E ratio for our Cybersecurity and Data Privacy basket of stocks is falling

At the stock level, despite year to date share price appreciation for companies like Crowdstrike and Zscaler – amounting to 47% and 34.6% respectively, these companies continue to trade below historical multiples.

Despite year to date share price appreciation, Crowdstrike and Zscaler continue to trade below historical multiples.

We expect a catch up to be coming.

After all, hot trends – including generative AI – can lead valuations to skyrocketing valuations in hot stocks. Focus gets narrowed, and investor FOMO kicks in. Accordingly, stocks end up being worth much more than their real value.

In contrast, current multiples in the cybersecurity industry suggest a far more reasonable valuation. These companies are currently attractively priced due to the fact that investors have not fully recognised the strong correlation between the cybersecurity sector – a secular beneficiary of AI – and the AI industry itself, which remains the center of attention.

When you combine this with the wider market opportunity on offer within cybersecurity, as cybersecurity companies leverage new technology to adapt and improve their offerings and penetrate new markets, sustainable long-term growth begins to look much more achievable.

Sustainable long-term growth

Generative AI is here to stay. It is probably going to change all of our lives. To profit from the disruption while mitigating the, what might be termed, “AI madness” in the stock market, cybersecurity provides a perfect pocket of opportunity.

References

McKinsey & Company, “New survey reveals $2 trillion market opportunity for cybersecurity technology and service providers”, October 2022. Available at: https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/cybersecurity/new-survey-reveals-2-trillion-dollar-market-opportunity-for-cybersecurity-technology-and-service-providers

Ibid.

Zscaler, “Zscaler Advances Cybersecurity and User Experience with New AI/ML Capabilities for the Zscaler Zero Trust Exchange”, June 2022. Available at: https://www.zscaler.com/press/zscaler-advances-cybersecurity-and-user-experience-new-aiml-capabilities-zscaler-zero-trust

Crowdstrike, “Introducing Charlotte AI, CrowdStrike’s Generative AI Security Analyst: Ushering in the Future of AI-Powered Cybersecurity”, May 2023. Available at: https://www.crowdstrike.com/blog/crowdstrike-introduces-charlotte-ai-to-deliver-generative-ai-powered-cybersecurity/

Darktrace, “Darktrace Cyber AI Research Centre”. Available at: https://darktrace.com/research

SentinelOne, “SentinelOne Unveils Revolutionary AI Platform for Cybersecurity”, April 2023. Available at: https://www.sentinelone.com/press/sentinelone-unveils-revolutionary-ai-platform-for-cybersecurity/

Bloomberg, as of close 20 July 2023.

Key takeaways

New opportunities

One step ahead

Sustainable long-term growth

References

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