24 Dec Which Cyber Security Company to Buy?
The real story of The Interview is more controversial than the movie plot itself.
The movie was about the fictitious assassination of Kim Jong Un. This outraged the North Koreans and they were alleged for hacking Sony Pictures.
Cyber warfare has brought to a new level when U.S. President Barrack Obama promised to retaliate. The subsequent black out of North Korea’s internet service does not seem like a coincidence.
Our world has increasingly become more connected via the internet. Technology is bridging the physical gaps between humans and shortening the communication lag. You can talk to almost anyone in the world as long as both of you have an internet connection.
The connection brought about many conveniences but it is no free lunch. Everything comes at a price. The price in this case is increased vulnerability for information theft.
We had seen cases such as leaked Jennifer Lawrence nude photos through Apple’s iCloud and regular reports of customer details being stolen from various companies.
Our society functions a lot on trust. We choose one brand over the others because we trusted it more. We are willing to swipe a credit card or provide personal information because of trust too. Cyber attacks and data loss will dent the trust and no company is going to risk losing brand equity that they have built over years.
Hence, Cyber Security has became a priority in both government and corporations. I expect expenditures on Cyber Security measures to increase in the future.
I took an elective on Cyber Security as part of my undergraduate studies many years ago. Oh man, it was dry and difficult to understand. I envy those computer geeks who can understand it and I believe they are going to be the big earners in the future. Not the bankers anymore.
Since I am not going to be employed as a hacker, I can only be a shareholder if I want to take advantage of the Cyber Security trend.
Lifecycle of a Company
Pioneer: These are startups in their first few years of operations and usually the angel investors and venture capitalists get to invest in them. Most businesses fail at this stage.
Growth: Those companies that survive the Pioneer stage will tend to capture market share quickly and grow at an exponential rate. Companies may go public at this stage as they have a convincing track record to show. However, they are still vulnerable and failure rate is pretty high. There will be numerous mergers and acquisitions to consolidate into bigger companies.
Mature: The companies surviving to this stage would be very matured and they are likely to be big companies with good brand image. However, it is very difficult to grow further as the demand in the industry has been fulfilled.
Decline: The unfortunate stage where businesses can no longer sustain their operations and they eventually become obsolete if they cannot reinvent their businesses.
I would say that for Cyber Security, as an industry, is in the growth stage.
We must be very careful at this stage because companies are vulnerable and can lose their place in the industry if their peers are better at winning market share. Moreover, there are likely to be many acquisitions, to buy out competition and muscle their way to the top. No one knows which company will emerge as the winner.
Some of the Cyber Security stocks are Palo Alto Networks, Check Point Software, FireEye, Cisco Systems, Fortinet and Proofpoint. While familiar to some, they may be very foreign to you.
It is very hard to guess who will come out on top ten years from now.
It is easy to gravitate to picking the biggest company from this lot. I must warn you that the biggest today may not be the champion of tomorrow. Remember Yahoo! was once bigger than Google. Uncertainty is the greatest risk in the growth stage. And it is even more risky for tech companies because an innovation can wipe out competition in the industry pretty fast.
My preference is NOT TO pick specific stocks when the industry is in the growth phase.
The safer option to participate in the Cyber Security growth is to invest in a Cyber Security ETF.
What?! You mean there’s such things? You are normal. I am equally surprised with the variety of ETFs!
The Purefunds ISE Cyber Security ETF, or code HACK, is one such ETFs. It was recently incepted on Nov 14 with an expense ratio of 0.75%.
It tracks the ISE Cyber Security™ Index which consists of 30 Cyber Security companies, weighted by market capitalisation.
The ETF embraces the survival of the fittest philosophy; only the top 30 Cyber Security companies will be held by the index. Any company that has deteriorating business will have dwindling stock prices. This would result in lower market capitalisation and eventually may be replaced by another Cyber Security company in the index. An investor need not worry about cutting losses for failed Cyber Security stocks as the index clears the deadwood automatically.
Is It Time To Invest
The Index has doubled in value in just 3 years. And the recent focus on The Interview incident has resulted in the rise in the index.
As a contrarian, and taking a long term growth view of the industry, I can afford to be patient and wait for the interest to wear off. And find a point of entry when the market or the index corrects itself.
To conclude, it is risky to pick Cyber Security stocks during the industry’s growth phase. Investing in an ETF will ensure your capital is invested with the surviving companies in the Cyber Security industry and allow you to participate in the growth with less risk. Isn’t it more prudent this way?
Disclosure and Disclaimer: I do not own this ETF and I am in no way sponsored by anyone to write this article. I am presenting my thoughts about the potential in Cyber Security industry and how I would participate in its growth. This is not a recommendation to buy.