Cyber Security: Attractive valuations after recent price rout

Based on financing activity, 2015 was a successful year for the cyber security industry. Due to diversified and increasing revenues as well as low volatility, cyber security stocks become attractive for investors.

With the falling stock markets at the beginning of the year, cyber security shares have lost on average eight percent of their value. However, they manage to outperform general technology stocks including the technology index Nasdaq 100. Cyber security stocks are more resistance against falling stock markets and recover faster than the broader technology share market.

The good performance of cyber security stock is based on the greater than ever security risks faced by governments, companies and individuals. Those are now investing more increasingly large amounts in the security of their IT systems, explains Anneka Gupta, Associate Equity & Commodities Strategist at ETF Securities. Due to their broad product portfolio that is attractive to a huge customer base, cyber security companies have more diversified sources of income than the technology industry in general.

Patrick Kolb, fund manager at the Credit Suisse, sees the recent market correction as an interesting opportunity too. He is of the opinion that “the market for IT-Security is a long-term growth theme that will be important for many years.” Investors can assume that spending on IT-security products will increase, not just because overall IT budgets are rising but also because expenditure is shifted in favour of security, analyses Kolb.

Gupta is of the option that the hype phase of the technology is over. Based on a model from Gartner, the expectations towards an technology are too high at the beginning until investors and consumers are disillusioned by reality. After the price-earnings ratio has reached its high of 70x in June 2015, it has fallen back to a level of 40x. Overall, says Gupta in the outlook of ETF Securities, the cyber security offers the opportunity “to get exposure to one of the fastest growing segments of technology at a comparatively low risk.”