Why you should invest in the cybersecurity sector

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With cybercriminals continuing to have plenty of targets the pressure will be on cybersecurity companies to stay a step ahead, which will potentially benefit investors.

The recent Census fiasco provided another reminder of the growing threat of cybercrime in Australia, which reportedly costs the nation up to $17 billion a year.

But with business and government spending on cybersecurity rapidly growing, investors have also become more alert to the threat.

In a recent report, the International Data Corporation projected a 38 per cent rise in global cybersecurity spending to US$102 billion by 2020, up from the projected US$74 billion spent in 2016.

The banking sector is expected to be the biggest spender, followed by manufacturers, governments and related agencies, with the strongest growth by region in North America, Western Europe and the Asia-Pacific.

In Australia, the federal government will invest more than $230 million over the next four years as part of its "Cyber Security Strategy," complementing a $400-million expansion in defence capabilities over the next decade.

In April's strategy launch, Prime Minister Malcolm Turnbull said: "The scale and reach of malicious cyber activity affecting Australian public and private sector organisations and individuals is unprecedented. The rate of compromise is increasing and the methods used by malicious actors are rapidly evolving."

According to PricewaterhouseCoopers, five out of six large companies in Australia have been targeted, along with 60 per cent of small and medium-sized enterprises.

Nearly 700,000 Australian businesses reportedly experienced a cybercrime in 2014, while an estimated 430 million pieces of "malware" were created last year, forcing constant upgrades of cyber defences.

With cybercrime costs projected to quadruple from 2015 to 2019, the sector is set for continued growth, particularly amid estimates that global e-commerce will reach a lucrative US$12 trillion in worldwide sales by 2020.

"The rate of increase is almost exponential ... and that's because obviously for a lot of the bad guys there is a massive incentive from a financial perspective to become very good at doing this," says Richard Byfield, managing director of cybersecurity firm Datacom TSS.

"As a result, more legislation is inevitable. There has to be increased investment and spend in cybersecurity, to both protect people and businesses".

Investment opportunities

For Australians, there are both local and international options for investing in the growth of cyber security.

Local companies in the sector include: Covata (ASX: CVT), a "pure play" cybersecurity provider; Prophecy International (ASX: PRO), which provides a network monitoring tool; Senetas Corporation (ASX: SEN), a provider of encryption hardware; and recently listed network security company Tesserent (ASX: TNT).

More listings are expected, which according to The Australian Financial Review could include UpGuard, an Australian cybersecurity business based in San Francisco, and Haventec, known for its "password-less cyber security system".

There are also expanding opportunities overseas, particularly in the United States.

According to BetaShares, the US Nasdaq CTA Cybersecurity Index has posted annual revenue growth of around 60 per cent in the three years to the end of June 2016, almost double that of its peers, while the index has seen annualised growth of 11.6 per cent in Australian dollar terms since its inception in September 2010 to August 2016.

US-listed companies include Barracuda Networks, which has seen its shares rise by 34 per cent in the year to 14 October, Cisco Systems (up 11 per cent), NXP Semiconductors (up 9 per cent) and Proofpoint (18 per cent higher).

The recently launched BetaShares Global Cybersecurity ETF (ASX: HACK) is designed to track the performance of the Nasdaq cybersecurity index.

The fund offers Australian investors exposure to companies in the United States, Europe and Japan, investing in "both existing marquee names as well as emerging players in the cybersecurity industry".

With PCs and smartphones already part of Australians' daily lives and smart cars and smart houses just around the corner, the new fund aims to capitalise on growth in the cybersecurity market, which "may be non-correlated to broader economic growth".

The "denial-of-service" attacks which shut down the Australian Bureau of Statistics' website on Census night earlier this year ultimately proved mainly an embarrassment to the authorities.

Yet with no sign that Australians plan a return to the paper age, cybercriminals will continue to have plenty of targets, keeping the pressure on cybersecurity companies to stay a step ahead and potentially benefit their investors.

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Anthony Fensom is a Morningstar contributor.

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