Why does the need for protection from a cyber attack not reach the stock market?

The future may be rosy, but the stock market screens are red: shares of the cyber companies on Wall Street retreated from the peak they reached in 2021 and fell by 26% from the beginning of 2022. Why is this happening and when will the gains resume?

Greenberg roasts

25/08/2022

Thursday, August 25, 2022, 1:07 p.m. Updated: 1:22 p.m.

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Cyber ​​attack: on the one hand, the field is the future, on the other hand, the stocks are faltering (Photo: ShutterStock)

Today's damages are tomorrow's profits: Cyber ​​attacks have become one of the five main risks to the activities of public and private companies, and have led the expected size of the global cyber market to approximately 156 billion dollars this year, and to approximately 376 billion dollars by 2029 - an annual growth rate of approximately 13.4%

According to other estimates, the growth is even expected to be higher, due to an international convergence of the various institutional bodies and companies in the regulation that requires the introduction of cyber risks as part of their risk management plan.

The number of cyber attacks has increased by about 600% since the start of the spread of the Corona epidemic in the world, and it is estimated that the global damages from them will amount to about 10 trillion dollars by the year 2025, which is an increase of about 233% compared to about 3 trillion dollars in damages from cyber attacks estimated in 2015.

The bulk of the cyber market, therefore, is based on the security services provided to countries, companies and organizations, which according to the data of the international survey site Statista is the main market segment currently benefiting from the growth of the field, and is expected to amount to approximately 82.3 billion dollars this year - approximately 53% of the entire cyber market.

The website's data also shows that the average expenditure of a company for cyber security for each of its employees is expected to be around $7,500 this year, and that most of the income from the information security services segment will be received from the USA.

The shares of the leading cyber companies on Wall Street.

They rose strongly at the beginning of the corona virus - and since then they have mostly been falling (photo: Walla! system, without)

The leading stocks were cut by dozens of percent

But while cyber shows an impressive growth rate, investors in the stock exchanges have lifted the handbrake on the sector's stocks, and an examination of the prominent cyber stocks on Wall Street shows that they have fallen by about 26% on average since the beginning of the year (as of the day of the test, since then the rate of decline has increased).

A much deeper decline than that of the leading indices in the US, such as the Nasdaq index, which fell by about 16% since the beginning of the year, and the S&P500 index, which fell by about 10% for the same period.

The examination of the stocks from the end of 2019, however, shows a sharp increase in the five stocks of the field that were examined, which stands at about 173% on average, and this is compared to about a 39% increase on average for the same period for the two indices mentioned.

The increase is even higher when examining the shares of the companies since the low price they reached during the Corona period, and stands at an average of about 287%, compared to about a 91% increase in the average for the two leading indices in the US stock exchanges for that period.

The stock that showed the highest increase among the five stocks we looked at is that of the cyber company CroedStrike, which is traded on the Nasdaq US stock exchange worth about $46 billion, after its stock jumped by about 508% since mid-March 2020, and by about 303% since the end of 2019.

On the other hand, the share of the cyber company Okta is in the opposite trend and has fallen about 53.53% since the beginning of the year, which sums it up to a drop of about 10% from the end of 2019, and because of this it was traded at a value of 16.4 billion dollars at the time of its examination (see table).

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Tejas Desai, research analyst at the American ETF company Global X (Photo: GLOBAL X)

Tejas Desai, a research analyst at the American ETF company Global X, explains: "During the last 12 months, there has been a sort of widespread explosion of targeted cyber attacks that manage to catch corporations and governments off guard.

Certain types of attacks, such as ransomware attacks, have even become a significant nuisance And according to SonicWall's 2022 cyber threats report, they jumped by about 1885% against governments around the world a year earlier.

A combination of factors led to this outbreak, among them the war that broke out in Eastern Europe, the beginning of a broad digital transformation of corporations and organizations to the cloud, a general increase in digital activity on the part of consumers on the one hand and businesses on the other following the corona virus, and the transition of industrial control and operation systems to digitization.

These directly affect the operational and supply chains, and have turned these attacks into a major area of ​​risk for manufacturers and global businesses.

Alongside all of this, phishing attacks are also on the rise, mainly due to the entry of billions of additional users to the Internet in recent years, and a wide range of digital sophistication on the part of the attackers, who attack and exploit victims more easily than before.

The corporations, for their part, are responding by increasing spending on cyber security, and this is a trend that will continue for the next 5-6 years, among other things in light of the US government's demand on the subject. After all, in early 2021, the US president signed a presidential order instructing agencies, employees and contractors to improve and transform More modern cyber security capabilities.

This was followed by the national security memorandum, which aims to prevent cyber attacks on the state's infrastructure, mainly on electricity, water and transportation.

The IIJA also allocated $1.7 billion in earmarked spending and $7 billion in contingency spending to ensure the nation's cybersecurity efforts.

And other countries will follow the USA.

The examination of the companies and the market reactions correspond to this.

CrowdStrike's activity, for example, is as an endpoint security tool and artificial intelligence that helps collect data and analyze cyber threats.

The company was one of the fastest growing cyber security platforms in the recent past, issued in 2018, and since then continues to grow at a rate higher than market needs.

Alongside this, the field of endpoints has been in high demand in the last decade and CrowdStrike was one of the first companies to help monitor and solve unique challenges that began to reach the relevant cyber space.

Over time the company has diversified its offering into cloud security, identity management and so on, and over the past 12 months its sales have grown 64% at an annualized rate, beating consensus estimates by 5%.

Moreover, in our view, the analysts' expectations regarding the company's future conservatively represent its possibilities.

Okta, on the other hand, competes against the original offerings of Microsoft, Google and Amazon, but offers a more agile solution for IT teams looking to diversify buyer risks.

The company is actually a leading provider of identity and access management tools.

It sells an API-first platform, which allows developers to build or integrate plug-and-play authentication systems into their applications, and has used this positioning to further expand into user management, monitoring tools, etc.

Recently, it actually increased its market share and the number of customers by purchasing another technological leader in the field called Auth0

for $6.5 billion, and we believe that the significant change in favor of remote work will be a tailwind to drive the consumption of the company's services."

Collecting the needs of the markets, but the competition in the cyber market has become especially intense with the establishment of hundreds of start-ups trying to bite the market with a solution that they see as better and more innovative.

"We have also seen mergers and acquisitions in the field of cyber security," continues Desai, "since there are many leaders in individual categories, and the industry is probably entering consolidation. In the end, in our view, we will see 3-4 major players combining and grouping together a portfolio of solutions.

A kind of Hyperscalers (Google, Microsoft, Amazon, IBM ) who are interested in moving forward together to examine the implementation of cyber security.

Industry estimates predict that spending on cyber security will grow by 11% this year and reach more than $172 billion, and there is a high chance that it will even surpass that mark. As geopolitical risks, along with IT demands Enterprises, remote work, and online shopping will continue to drive demand for security solutions.

Meanwhile, stocks in the field have retreated significantly from the all-time highs they reached in mid-2021, but the underlying growth in the field continues to be solid. In our estimation, investors will eventually notice this disconnect between actual results and risk which is expressed in multipliers".

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