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          Five New Reasons to Consider the Evolving Cybersecurity Landscape

          Cybersecurity and Data Privacy

          Written by: Tom Barker, CAIA

          Published: 12 December 2023



          Key takeaways

          Large-cap companies now hold 50% of cybersecurity market equities, up from 30% three years ago, reflecting industry consolidation with over 450 M&A deals seen last year.

          Cybersecurity stocks are positioned to benefit in a declining rate landscape, offering investors resilience and growth potential.

          Top cybersecurity companies have reported substantial profits driven by AI, with the majority of the sector continuing to exceed earnings expectations.

          Many investors are familiar with the investment case for cybersecurity. In the digital era, the rapidly growing number of interconnected devices is expanding the attack surface for cyberattacks. This in turn has driven the relentless demand for cybersecurity products and services.

          In 2023, artificial intelligence (“AI”) has further catalysed innovation and the growth of this indispensable sector. For investors, the nature of a portfolio allocation to cybersecurity is also evolving. In this note we explore five recent developments that highlight cybersecurity as an investment option.


          1. Large caps now make up the lion’s share of the cybersecurity public market and offer reduced downside risk than was the case even a few years ago

          Three years ago, around a third of listed cybersecurity equities were small-caps. Today, this stands at just 8% whilst the share of large caps has grown from 30% to 50%.1 This maturation of the cybersecurity theme follows considerable consolidation within the industry, with over 450 cybersecurity M&A deals seen last year alone.2

          Today, the public market harbours the survivors of the highest whipsaw of a rate-hiking cycle we’ve seen in the past 50 years. Furthermore, the evolution of the market cap allocation in the cybersecurity theme towards large-caps suggests downside risk is therefore far more subdued today than was the case even two or three years ago.

          Percentage of large-cap, medium-cap and small-cap companies in cybersecurity sector

          2. Positioning for a Declining Rate Landscape

          Cybersecurity stocks stand to benefit in the face of a rate cuts. This could drive multiple expansion in technology stocks, particularly with financially prudent and operationally efficient companies. As interest rates decline, the lower cost of capital enhances the attractiveness of these technology-intensive firms, enabling them to fund research, development, and expansion initiatives more affordably. Additionally, the long-term nature of cybersecurity contracts and subscriptions provides a stable revenue stream, insulating these companies from short-term economic fluctuations.

          Investors seeking resilient and growth-oriented assets may find cybersecurity stocks particularly appealing given the expected shift towards a lower-rate environment. At the time of writing, futures markets are pricing in over 5 interest rate cuts by the Federal Reserve and an implied policy rate of 3.90% by January 2025.

          Interest rate cuts by the Federal Reserve and an implied policy rate (Jan 2024 - Jan 2025)

          3. The Cybersecurity Sector Remains In Secular Growth Mode

          The global cybersecurity market was valued at $222 billion in 2022. By 2030, the market is forecast to exceed $657 billion, a CAGR of around 13%.3

          Size of Cybersecurity Market Worldwide from 2021 to 2030 (in $USD billion)

          In an era marked by both intensifying regional divides and burgeoning digital connections, cyber-risk stands as the paramount threat to businesses and governments alike. However, within this challenge lies a monumental opportunity for the cybersecurity industry. The responsibility of shielding ordinary citizens, multinational entities, and sovereign nations from malicious cyber activities now squarely rests with this essential sector.


          4. The Catalytic Role of Artificial Intelligence in 2023

          The revolution in cybersecurity is underscored by recent reports from industry leaders like Palo Alto Networks and Cloudflare in their latest earnings calls. Palo Alto Networks has achieved a 97% decrease in false positives and a 60% enhancement in threat interception, crediting AI for these advances.4 Their CEO stated, “In the last 5 years, our Total Addressable Market (TAM) in cybersecurity has grown by approximately 14%, surpassing the IT market’s growth. With AI now a core tool, we’re capitalising on this by intensifying our technology investments.”5 Cloudflare reported an increase in the use of their R2 product, particularly among AI startups, signifying their growing preference for Cloudflare’s cost-efficient GPU usage for model training.6

          These insights underline the pivotal role AI is playing in the evolution of cybersecurity offerings. We foresee that such technological advancements will allow cybersecurity firms to lower costs, make their products more affordable for the mass market, and consequently expand their total addressable market even beyond the current scope, as many cybersecurity firms embrace these innovative solutions.

          5. Earnings Results Continue to Exceed Expectations

          It has been a year of significant growth for revenue and earnings in the cybersecurity sector. The latest Q3 2023 reporting season was no different.

          Q3 2023 Reporting Season – Growth Rates


          Source: Bloomberg as of 30 November 2023.

          Compared to analyst expectations, 83% of the companies have reported earnings that exceeded expectations. These earnings beats, in both this earnings seasons and previous seasons, have been a strong driver of the significant 2023 performance for the sector.

          Q3 2023 Reporting Season – Earnings Surprises vs Analyst Expectations


          Source: Bloomberg as of 30 November 2023.

          Q3 2023 Earnings Season – Company Highlight

          Crowdstrike published its Q3 2023 earnings on 28th November 2023 and surprised the market with EPS of $0.11 which was approximately 85% higher than consensus analyst forecasts.7 Quarterly revenue growth of $786 million was 35% higher year-on-year.8 CrowdStrike’s robust market share growth in enterprise security is underpinned by its elevated win rates in endpoint security. The company has further bolstered its offering by incorporating additional modules such as data-loss prevention, workload security, log management, and identity solutions. Despite facing some headwinds in billings, net new annual recurring revenue exceeded consensus estimates by approximately 5%. Similar to Zscaler, who also announced stellar results on November 27th, CrowdStrike’s remaining-performance obligation (RPO) gain of 32% aligns with its sales growth.9


          Cybersecurity has long been an investable thematic exposure, but its maturation offers investors exposure to the same unparalleled growth and innovation but with more favourable downside risk through a large-cap bias. As we transition to a declining rate landscape where artificial intelligence and economic growth converge, the opportunities within this dynamic industry are boundless.



          Rize ETF, November 2023. Cybersecurity market as proxied by the constituents of the Foxberry Tematica Research Cybersecurity & Data Privacy USD Index


          Statista, Next Move Strategy Consulting, November 2023




          Cloudflare Q2 2023 Earnings Call, August 2023. Available at: Cloudflare Q2 2023 Earnings Call


          Bloomberg, November 2023


          Bloomberg, Crowdstrike Q3 2023 Earnings Results, November 2023. Available at: Crowdstrike Q3 2023 Earnings Results


          Bloomberg, Zscaler Q1 2024 Results, November 2023. Available at : Zscaler Q1 2024 Results

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