Cybersecurity stocks: how to trade the cybersecurity industry

The increasing reliance on internet connectivity has boosted the cybersecurity industry. Find out more about the sector’s outlook and stocks to watch in 2023.

Cybersecurity industry overview and outlook

Cybersecurity stocks are the shares of companies involved in protecting online systems against criminal activity – such as ransomware, phishing and other kinds of cyberattacks.

The industry has been on the rise ever since the creation of the internet, but it’s boomed since the Covid-19 pandemic began and remote work became essential.

This has meant that established computing giants are also moving into the sector, either launching their own offerings or acquiring existing firms. For example, Microsoft (MSFT) has started selling its cybersecurity products at a discounted rate, undercutting a lot of smaller firms. And Alphabet (GOOGL) acquired cybersecurity firm Mandiant in a $5.4 billion deal in 2022.

In 2022, when Russia invaded Ukraine, the geopolitical tensions created enough fear of nation-backed cybercrime that U.S. President Biden publicly encouraged companies to tighten their cyber defences and invest in the sector.

Morgan Stanley’s survey of chief information officers conducted in July 2022 found that cloud computing and security software were at the top of the priority list for businesses – ahead of analytics and artificial intelligence.

This supports projections that global spending on risk management products will grow 11.3% in 2023, up to £188.3 billion.

While this all sounds positive for cybersecurity stocks, the global bear market still wiped value off the cybersecurity industry throughout 2022, so it’s important to read up on the latest industry news before taking your position.

How to trade and invest in cybersecurity stocks

Trading and investing in the cybersecurity industry have grown in popularity over the last few years due to the industry’s growth, opening up a variety of routes to the market.

For those with a longer-term outlook on the sector, investing is the most common route. This involves buying the shares of an individual company or buying a unit of an exchange traded fund that tracks a basket of cybersecurity stocks, in the hope that they rise in price and can be sold on for profit later.

But for those with a more short-term, speculative view, trading cybersecurity stocks could open up more opportunities. By taking a position on company shares and ETFs via derivative products – such as CFDs – you can try and predict which direction the market price will move in. And because you never take ownership of the underlying shares or units, you can take advantage of markets that are falling in price, as well as those that are rising.

However, trading CFDs does come with its own drawbacks. So, it’s important to read up on the risks of CFDs, and how to mitigate them.

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Best cybersecurity stocks

The best cybersecurity stocks will vary depending on whether you’re looking to trade or invest in the company. For the longer-term view, you’d be looking for stability and growth, but for short-term traders, volatility is important in creating opportunities.

It’s worth noting that the cybersecurity industry is extremely dynamic due to constantly changing threats. This means the ‘best’ companies to trade today might not be the best tomorrow as companies will need to work quickly to have a competitive advantage. That makes it important to do your research and due diligence, and not rush into positions. 

Let’s take a look at some of the top stocks by market capitalisation.

U.S. cybersecurity stocks

The U.S. has the largest cybersecurity market, not only in terms of consumers seeking the products, but the sheer number of companies involved in the sector. You can always get exposure to some of the larger, diversified companies (like Microsoft and Google) but some of the world’s larger pure-play cyber stocks are listed in the U.S. too.

1. CrowdStrike - $22 billion
2. Zscaler - $15 billion
3. SentinelOne - $4 billion

CrowdStrike

CrowdStrike Holdings (CRWD) is an endpoint security company, which provides protection for devices that connect to a network, such as laptops and PCs, as well as servers. CrowdStrike also has integration agreements with other tech companies to protect data across entire IT infrastructures.

CrowdStrike’s software is cloud-based, which made it a particularly popular solution for companies throughout the pandemic with the switch to remote working. Even in the post-pandemic world, CrowdStrike’s sales have been growing with the greater number of hybrid workers. The company’s non-GAAP net income was $96.1 million for Q3 2023, compared to $41.1 million in the third quarter of fiscal 2022.

However, that didn’t stop the company’s shares from falling over 45% throughout the last year.

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Zscaler

Zscaler (ZS) is another cloud security company, which enables organisations to provide employees with access to internal apps and services securely.

Scaler started out as a software-as-a-service product for cloud computing protection, but is now more focused on end-user monitoring products, which have risen in popularity with the working-from-home trend.

Zscaler has been increasing its sales throughout the last few years, posting impressive revenue growth, but remains unprofitable. Investors do seem to be turning away from such high-growth-low-profit stocks at the moment, which saw Zscaler stocks sold off by 65% throughout 2022.

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SentinelOne

SentinelOne (S) is a relatively new cybersecurity stock, only going public via an initial public offering (IPO) in June 2021. It operates a cloud-based endpoint security platform – directly competing with CrowdStrike – which means it detects and resolves cyber threats.

At the time of its IPO, SentinelOne was valued at $10 billion and is now worth just over $3.75 billion. But despite the market slowdown, the company has been popular and has increased its revenue by 105% year-on-year, reporting sales of $115.3 million in Q3 2023.

Open an account or log in to trade SentinelOne shares and view its live share price.

Canadian cybersecurity stocks

Like the U.S., Canada is home to a lot of pure-play cyber stocks, as well as some diversified listings. Unlike the U.S., there aren’t as many to choose from. Here are some of the most popular stocks for those interested in cybersecurity trades.

1. Blackberry - $2 billion
2. Absolute Software - $801 million
3. Magnet Forensics - $499 million

Blackberry

Blackberry (BB) is probably most well-known as a smartphone manufacturing company, so a lot of people aren’t even aware that it’s a leading cybersecurity software firm too. But it’s exactly this diversified nature that many believe puts Blackberry in a good position.

BB uses machine learning to design solutions, which means its capabilities are continuously evolving as threats to the industry change.

The cybersecurity segment made BlackBerry $106 million in Q3 2023, compared to $128 million in the same period the year before and far lower than expectations of $164 million. This caused Blackberry shares to drop despite otherwise posting positive earnings – giving an insight into how much significance investors place on Blackberry’s cybersecurity arm.

Trade Blackberry shares in a live account, or practise trading first in a demo.

Absolute Software

Absolute Software (ABST) is a platform-based company that helps users strengthen their resilience to ransomware and malicious attacks. It’s commonly used in commercial, healthcare and education industries, as well as by governments.

Although it is a Canada-based, and Toronto-listed company, it derives most of its revenue from U.S. markets. For FY22, Absolute reported record revenues of $197.3 million, but its net income fell from $3.7 million in FY21 to -$24.5 million as supply chain issues and macroeconomic factors weighed on costs.

Magnet Forensics

Ontario-based Magnet Forensics is a data analytics company that aids government agencies involved in investigating cybercrimes. It has a host of products that help security agencies investigate fraud, prevent IP theft, track down cyber criminals and look into employee harassment.

Magnet Forensics’ services are in high demand, but like a lot of tech stocks, its share price has seen better days. For Q3 2022, the company saw revenues up 41% YoY, but net income was down to $1.4 million from $2.2 million in Q3 2021. Magnet Forensics said the decline was due to increased investment in marketing and R&D.

UK cybersecurity stocks

The UK only has a couple of publicly listed cyber stocks to choose from, as a lot of companies have been acquired in recent years or gone private. But the sector is still home to some big names, including:

1. Darktrace - $2 billion
2. Kape Technologies $1 billion

Darktrace

Darktrace (DARK) is a British-American tech company specialising in cyber defence. It uses self-learning artificial intelligence tools to fight against cyber-attacks in real time.  

Despite being a relatively new firm, established in 2013, Darktrace is the largest pure-play cybersecurity stock on the London Stock Exchange (LSE).  Previously, Avast held the title, but the firm was acquired by Norton Life Rock (Gen Digital) in September 2022.

Darktrace launched its IPO on the LSE in April 2022 at a price of 250p per share. Like a lot of cyber companies, its shares have experienced extreme volatility, reaching a high of £9.45 in October 2022 and falling back to 254p in January 2023.

In February 2023, Darktrace was accused by New York-based hedge fund Quintessential Capital Management (QCM) of questionable sales and accounting practices in a 69-page report. Darktrace has denied the allegations and hired auditor EY to review its finances. 

Darktrace is not yet profitable, but its annual recurring revenue rose 40% for the year to $511.5 million. However it has also warned of waning customer sign ups, which could impact its future outlook.

Open an account or log in to trade Darktrace shares and view its live share price.

Kape Technologies

Kape Technologies is an AIM-listed cybersecurity stock that’s focused on developing digital products for individuals. Although it’s not a large cap, it’s become a must-watch for cybersecurity stock fans given its improving fundamentals.

Unlike Darktrace, Kape Technologies became profitable three years ago and continued ever since. For its H1 results, it reported operating profit was up 333% to $59 million and revenues were up 216% to $302 million.

In the last three years, Kape’s share price has risen over 75%, from 159p per share to 280p. That’s not to say it hasn’t experienced its fair share of volatility along the way, especially given the broader market decline.  

However, following the acquisition of Avast, there’s been a lot of speculation that Kape Technologies could also be the target of a larger cybersecurity firm.

Chinese cybersecurity stocks

Chinese cybersecurity stocks have been experiencing greater investment as the government looks to shore up data protection – especially amid rising tensions with the United States.

There aren’t many public, pure-play cyber defence companies to trade in China and as reporting obligations are different, there’s little information out there about company performance.

Some big names in the industry are DBAPPSecurity and Bluedon – two network information security companies – and Hillstone Networks, a cybersecurity solutions firm.

Cybersecurity ETFs

Another option for trading the cybersecurity industry is an exchange traded fund – which gives you exposure to multiple companies from a single position.

For example, the First Trust NASDAQ Cybersecurity ETF replicates the price and yield of the Nasdaq CTA Cybersecurity Index, which tracks the price of Nasdaq-listed companies involved in building and managing security protocols for individuals and corporations.

Not all of the companies are solely involved in cyber defence, but it gives exposure to the industry.

Its top holdings are:

1. Broadcom
2. CISCO
3. Fortinet
4. Infosys
5. Palo Alto

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