The threat of cybercrime is everywhere. From allegations that Russia hacked the U.S. presidential election to security issues involved with mass surveillance, this environment may provide an opportunity for some investors in cybersecurity.
Yet this market is complex. Seth Scholar, Vice President and Senior Portfolio Manager of
U.S. Bank Private Wealth Management in San Francisco, says security products have to adapt to motives, tactics and criminals that are always changing.
Scholar anticipates that one of a number of long-term trends to watch is artificial intelligence (AI) — software that can sense changing conditions and make its own decisions about how to react. This includes dealing with external, evolving threats to organizations as well as internal threats that originate within a company’s own network.
“Some AI is progressing at an unprecedented pace,” he says. These advancements may be exciting for the power of the software to assist humans, but they are also necessary to keep up with the ingenuity and increasing sophistication of cybercriminals.
Investors in cybersecurity face a fragmented industry of startups, small specialized companies and larger vertically integrated corporations that typically grow by acquiring startups for their innovations, which they bolt onto their own products, Scholar says.
The cybersecurity industry is sensitive to economic cycles, with orders evaporating on the downswing.
It consists of:
- Sizable technology and consulting firms that create soup-to-nuts solutions and compete by bundling products and services
- Startups that are nimble, often undercapitalized and have products that are targeted; these startups, however, may be too specialized to remain independent
- Vendors to government that rely on sporadic, though large, contracts with substantial loyalty from government agencies
- Firms that sell directly to consumers and have their profits whittled down by fierce competition
Improved technology, increasing services, end-user education and global coordination are all important in fighting cybercrime.
For more information on investing in cybersecurity, visit ascent.usbank.com/insights/long-term-investing-cybersecurity.