Challenges Linger, but Cybersecurity Needs Remain Urgent

Technology and growth stocks are struggling to start 2022, and cybersecurity names aren’t proving immune to that trend.

That doesn’t mean that the fundamental picture for the industry is changing for the worse, nor does recent tech weakness imply that investors should simply gloss over cybersecurity’s still-valid long-term thesis. Investors looking to dip their toes into cybersecurity today might want to evaluate the WisdomTree Cybersecurity Fund (NASDAQ: WCBR).

As is the case with some high-growth tech segments and thematic strategies, the recent sector-wide pullback made some cybersecurity names, including some WCBR components, attractively valued — something that can rarely be said of this group. And with that, cybersecurity still remains highly relevant to tech investors.

“It is estimated that in 2020, spending on cloud computing, specifically infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) was $106.4 billion, expected to grow to $217.7 billion by 2023,” writes Christopher Gannatti, WisdomTree global head of research. “Now, cloud workloads need to be protected—but how much spending is estimated on the cybersecurity element? In 2020, it was roughly $1.2 billion, and in 2023, it is estimated to be $2 billion. That means that in 2023, it’s possible that spending on cloud security will be less than 1% of spending on cloud services.”

Gannatti’s points about cloud computing are important because they underscore that cybersecurity intersects with other disruptive technologies, lengthening the runway of potential growth opportunities.

Another point in WCBR’s favor is that cybersecurity is increasingly viewed by corporations and governments through the lens of “an ounce of prevention is worth a pound of cure.” Gannatti highlights the example of credit card issuer Capital One. In 2019, a cyberthief swiped the personal data of 100 million people from Capital One. The following year, the company had to pay $80 million to regulators, and that was followed by a $190 million class action settlement last year.

The point is that companies are learning that it’s usually more cost-effective to spend on cybersecurity before a large-scale attack occurs because the post-attack spending is likely to be heavier. Still, investors are concerned, and rightfully so, about the impact of rising interest rates on cybersecurity stocks. With that in mind, it pays to take a long-term view of WCBR.

“The key risk, as we see it, is that many cloud-focused cybersecurity companies delivered unbelievable share price returns in recent years and these firms may see their valuations adjust as interest rates rise—even if their revenue growth continues. Thinking beyond simply the returns of 2022 could be important when thinking about the cybersecurity megatrend,” concludes Gannatti.

For more news, information, and strategy, visit the Modern Alpha Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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