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Cybersecurity – why it matters and 2 share ideas

We take a look at the growing opportunities in cybersecurity and explore the risks that investors should keep in mind.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

A huge leap in the use of technology in our daily lives has created new cybersecurity challenges.

This has implications for most businesses, especially if they look after personal information and people’s assets, like money.

Financial services companies, like banks, have to prove they’ve got strong enough controls in place to prevent financial scams and fraud – from identity theft to financial abuse.

The UK stock market is heavily weighted towards financial services. The regulatory spotlight that comes with this is something to think about for investors in this space. It’s an ongoing risk, and any major missteps can mean not only significant fines, but falling share prices as well.

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How can investors manage this risk?

Investors should take a look at a company’s annual report. These are readily available on company websites.

You can get a sense from this of how seriously it’s taking cybersecurity obligations and what work it’s done to meet regulatory guidelines, or not.

At the same time, cybercrime activity is another reminder to focus on companies with strong balance sheets and cashflow.

When it comes to investing in lenders or other financial companies, these markers are important, but even more so through the lens of cybersecurity.

Companies with financial strength have more resources to throw behind prevention, but they’re also more likely to be able to stomach a fine if one came their way.

What are the opportunities in cybersecurity?

When new threats like cybercrime emerge, so do novel preventions. There’s a lot of new tech for things like data privacy and protection as well as broader cybersecurity. With few companies allowed a seat at this table and with a growing addressable customer base, the door is open to rewarding and recurring revenue streams.

Not only are prevention tools an exciting product, but the huge use of cloud storage shouldn’t be overlooked. Not many companies have the scale – or, crucially, the security firepower, to be trusted handling huge amounts of company data. Over 60% of corporate data is stored in the cloud as of last year. And most of that lives in Amazon’s Amazon Web Services, or Microsoft’s Azure.

Artificial intelligence (AI) will also play a part in scam detection and prevention moving forward. But it’s a notoriously expensive gig to fund and develop, which also puts big tech companies in the driving seat.

Two cybersecurity share ideas

Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

This article isn’t personal advice. Investments and any income from them can fall and rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, seek advice. And remember, past performance isn’t a guide to future returns.

1

Darktrace

One homegrown company at the forefront of cybersecurity is Darktrace, a UK-based AI specialist, with a focus on cybersecurity. It’s easy to understand the attraction in today’s climate of constant cyber threat, and Darktrace’s reach is huge, working with almost 9,000 organisations globally.

While the product is appealing, there are some concerns from an investment perspective.

The first is that its operating margins are still thin at under 7%. Research and development costs hit almost $48mn last year, which is high compared to underlying operating profits of $83mn. We’re impressed with the overall progress on profitability, but we’d like a longer run of proof that margins can keep growing.

For investors prepared to take on extra risk, Darktrace could offer potential. But there’s a higher likelihood of ups and downs.

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2

Amazon

Amazon’s enormous cloud computing business, Amazon Web Services (AWS) puts it at the epicentre of growing cybersecurity demand.

Other tech companies might have cloud security offerings, but Amazon is widely regarded as having the biggest range of products and options.

This can make it more attractive. As can the fact many of Amazon’s cyber security solutions are done as a pay-as-you-go basis, which can look more cost effective for customers. The huge scale and complexity of some of Amazon's product suites also make it tough for customers to leave.

The flip side is that it’s caught the eye of regulators who want to ensure fairness and a good experience for consumers. We think the reality is that Amazon will stay at the forefront of cloud security solutions and that customers will remain highly loyal. But it’s a risk that needs monitoring.

Once the infrastructure is set up, a high proportion of revenue can filter down to profits, and this has helped profits climb at Amazon. Last quarter Amazon as a group generated operating profit of $11.2bn.

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What investors need to remember

  • Cybersecurity incidents are increasing, and this means companies handling large amounts of personal data and assets are under higher levels of scrutiny from investors and regulators.

  • As an ongoing risk, cybercrime activity is a reminder to invest in companies with strong foundations.

  • Growing cybersecurity demand is creating long-term opportunities for companies – but these should be considered carefully.


This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views might have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 11th January 2024