Five New Reasons to Consider the Evolving Cybersecurity Landscape

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.

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.

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

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 28^th 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