Mid-Year Cybersecurity Review: Part 2

In the past year, investor attention has been predominantly captured by the AI sector, leading to substantial capital allocation into AI equities.

This focus has overshadowed other strong technology investment sub-themes, including cybersecurity. Accordingly, many high-quality growth cybersecurity companies are currently undervalued relative to their growth prospects (and even relative to their fundamentals, today). Leading cybersecurity companies continue to demonstrate revenue and earnings growth and Annual Recurring Revenue (ARR) remains resilient and expanding. Recent earnings disclosures from commonly watched names highlight this trend:

1. Palo Alto Networks (PANW): Reported +15% YoY revenue growth in latest earnings.¹
2. CrowdStrike (CRWD): Revenue grew +38% YoY in latest earnings. Reported +39% YoY growth in ARR, reflecting strong demand for comprehensive endpoint security platform solution.²
3. Zscaler (ZS): Achieved +45% YoY revenue growth, underscoring strong demand for cloud security.³

In this Part 2 of our Mid-Year Cybersecurity Review, we examine the key trends and factors shaping the sector’s outlook, including increasing spending, geopolitical tensions, regulatory mandates, business integration and AI advancements.

CrowdStrike’s Ascent into the S&P 500

CrowdStrike was included in the S&P 500 on June 24^th, 2024,⁴ marking a notable development for the cybersecurity industry. This follows Palo Alto Networks’ addition on June 20^th, 2023.⁵ The inclusion of these two cybersecurity companies in the S&P 500 emphasises the sector’s growing importance and investment potential. Their inclusion signifies strong financial performance and growth prospects and highlights cybersecurity’s essential role in modern business operations and national security.

Major Catalysts Ahead

As we look ahead, several factors are poised to drive the growth of the cybersecurity sector:

1. Greater Cybersecurity Spending Amidst Digital Transformation: Global cybersecurity spending is projected to soar to $215 billion in 2024, a 14.3% increase from the $188.1 billion estimated in 2023. This growth is driven by the escalating sophistication of cyber threats, regulatory mandates and ongoing digital transformation. Growing cybersecurity investment highlights its critical importance in safeguarding digital infrastructure in an increasingly digital world​ (The Cyber Express).
2. Global Political Uncertainty and National Security Priorities: Rising geopolitical tensions and the increasing prevalence of state-sponsored cyber warfare are significant drivers of cybersecurity spending. Nations are investing heavily in cyber defenses to protect against sophisticated attacks. We expect governments to constitute an increasingly larger share of the customer base for cybersecurity companies. Robust cybersecurity infrastructure is essential not only across the private sector but also for governments / proxy-governmental organisations (Password Vault)​.
3. Data Privacy Crackdowns by Regulators: On December 15^th, 2023, the U.S. SEC implemented new cybersecurity rules mandating that public companies disclose material cybersecurity incidents within four business days of determining their materiality, with penalties for non-compliance. These mandates closely mirror many provisions of the European GDPR. The rules aim to standardise cybersecurity disclosures, making them more consistent and useful for investors. This regulatory landscape ensures continuous and substantial investments in cybersecurity to comply with legal standards and protect public shareholders against cyber threats​ (gov)​​ (SEC.gov)​​ (Skadden, Arps, Slate, Meagher & Flom LLP)​.
4. Cybersecurity Products Become Business Staples: Cybersecurity is now a fundamental business necessity. As organisations accelerate digital transformation in the new age that is “AI computing”, cybersecurity becomes integral, moving from luxury to sustenance. We have already seen companies allocate a growing portion of their IT budgets to cybersecurity and this allocation is becoming increasingly resilient year over year, consistently growing without decline. Cybersecurity is therefore no longer a discretionary expense but a critical component of essential business continuity​ (The Cyber Express)​​ (Password Vault)​.
5. The Power of AI in Unlocking Revenue and Lowering Cost: AI is improving threat detection and response. AI-driven tools have the ability to analyse vast amounts of data in real-time, identifying potential security threats more efficiently and effectively. Also, AI helps reduce operational costs by automating routine tasks, enabling cybersecurity firms to scale more rapidly and invest in growth. AI-driven transformation is therefore expected to improve the profitability of cybersecurity companies, making their stocks more attractive to investors​ (Password Vault). Examples of cybersecurity companies using AI include:
   • CrowdStrike’s Charlotte AI significantly enhances threat detection and response, automating routine tasks and reducing investigation time by 75%. This AI-driven approach to cybersecurity has been shown to help security teams reduce an average of 2 hours per day, allowing them to focus on more strategic initiatives.⁶
   • Palo Alto Networks is using AI to analyse massive datasets for threat detection and response for their customers. For instance, Palo Alto Networks’ AI capabilities have been shown to be able to improve the accuracy of identifying potential threats by 85%.⁷

Conclusion

The cybersecurity sector is poised for robust growth, driven by advancements in AI, rising geopolitical tensions and increasing regulatory mandates. High-quality companies in this space remain undervalued, offering significant investment opportunities. We believe that investing in cybersecurity now positions us well for the inevitable digital transformation ahead. As Mark Twain once said, “The secret of getting ahead is getting started.”