Cybersecurity in focus as Goldman Sachs upgrades CrowdStrike

We got an interesting insight into cyber warfare earlier this month, when it emerged that Russian hackers had launched a cyber attack on Ukraine’s power grid, along with parallel attempts to sabotage the computer systems that would be needed to restore it. .

On the contrary, Russia’s decision, which was revealed by Ukrainian government officials and the Slovak cybersecurity company ESET, was likely overdue given that these types of attacks on critical infrastructure can produce an optimal level of damage. relative to the resources employed – more bang for your buck, so to speak. (The Ukrainian power grid has already been taken offline twice, in 2015 and 2016.)

If Ukraine were to reverse tactics, it would be a classic example of asymmetric warfare, essentially tactics employed by a weaker adversary to negate or undermine the advantages held by a stronger adversary.

This type of warfare, which is not limited to national threats, has grown in importance in the digital age and extends to the corporate sphere. Cheaply produced malware can render targeted systems useless simply by erasing key data. It is much cheaper to disable a power plant by compromising its digital systems than to destroy it with a missile.

None of this is new to investors, at least those familiar with cybersecurity, a global industry that Astute Analytica expects to grow at a compound annual growth rate of 13.4% over the forecast period. from 2021 to 2027, reaching an aggregate value of $346 billion. (£266 billion), or 45% of the current US defense budget.

The scale of the problem is evident in figures released by international law firm RPC, stating that “financial data belonging to as many as 42.2 million people in the UK have been compromised in data breaches l year, up 1,777% from 2.2 million in 2019 -20”.

At the heart of the cyber defense mechanism is the SOC, or Security Operation Center, best described as the combination of technologies, people and processes used to detect, analyze and prevent cyber security incidents. It can take many forms beyond conventional firewall mechanisms to prevent hackers from entering a network. One of the most anticipated or high-profile initial public offerings of the past year was for Dark Trace (DARK)a cybersecurity company that uses artificial intelligence and machine learning to evolve in the face of growing threats.

It could be argued that the inherent need for adaptability in this space lends itself to a software-as-a-service model. Industry analysis by US-based technology research and consultancy firm, Gartner Inc, clearly indicates that a tailored offering is the preferable option in most cases, concluding that “the swapping of security operations is broad, meaning that what works for one entity is unlikely to be the best answer for another.” This suggests that cybersecurity operations are more likely to fit within a given organization, with positive implications for the recurring revenue rate.

Is it time to make an incursion into the sector? The investment case is quite clear, even if it is an increasingly crowded and somewhat fragmented market. Some companies will outperform the sector, generating substantial alpha returns. It’s an attractive space for stock pickers, but given the general growth rates on offer, investors may opt for pooled vehicles and/or exchange-traded funds, a point recently highlighted by Dave Baxter of the CI. Consider that the L&G Cyber ​​​​Security (UCITS) ETF has generated an annualized rate of return of 16.6% over the past five years – not too shabby a return with inflation at its highest level in several decades. .

Another point to consider is that companies in the sector have fallen due to sporadic selling in technology stocks over the past seven months or so. Although appetite for high-growth tech stocks waned long before Russia’s invasion of Ukraine, it’s worth remembering that the structural drivers of the cybersecurity market remain intact.

This has not escaped the analysts of Goldman Sachs (US: GS). The investment giant has just raised its recommendation on CrowdStrike Holdings (US: CRWD) to buy’, believing that the “cybersecurity company’s valuation is compelling at current levels”. While the 2023 full-year (fiscal year) company-to-sales multiple of 17.4 “looks high,” the stock trades at a low 0.4x on a growth-adjusted basis. Cash earnings of $252 million are expected to reach $392 million for fiscal 2023, with a free cash flow yield of 1.3%, down from 0.8% last time. The view is that CrowdStrike is “in the sweet spot of demand before the accelerating deterioration of the threat environment.”

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