Investment bankers Eight Capital released on Tuesday a report on the cybersecurity investment space, with analyst and report author Christian Sgro arguing that with cybercrime continuing to be top-of-mind for companies worldwide, the cybersecurity industry should continue to grow, even within the currently challenging macroeconomic environment. Sgro pointed to four companies in Eight Capital’s coverage that have exposure to the cybersecurity sector, all of which currently have Buy ratings from Eight Capital.
Sgro said while the techniques used to commit cybercrime are not new — stolen credentials, phishing and email compromises are common forms — the impacts being felt on businesses have been ramping up over the years. Sgro pointed to a recent study saying global cybercrime costs will rise by 15 per cent year-over-year for the next five years, hitting US$10.5 trillion by 2025, while the cost of each data breach rose in 2022 by 2.6 per cent from 2021.
That mean more money spent by businesses on shoring up their protection, with Gartner saying end user spending on information security and risk management will reach US$267.3 billion by 2026, growing at an 11 per cent year-over-year rate. It’s enough to put cybersecurity in the realm of recession-resilient businesses, Sgro said.
“We expect that cybersecurity will remain one of the more resilient corners of IT spending for the foreseeable future. We think security should be shielded from budget cuts because of how closely tied it is to operational, financial and reputational risk,” Sgro wrote.
Supporting that claim, Sgro pointed to a recent PwC survey of over 3,000 business and technology executives which found that 65 per cent of organizations intend on increasing their cyber budgets in 2023. And while that number is down from 69 per cent a year ago, Sgro said the results are still encouraging when put in the context of the broader macro pressures currently weighing on all aspects of enterprise IT budgets.
As for investment in cybersecurity-related stocks, the past year has been a particularly tough one, as names across the board have fallen sharply within the general market rotation away from growth stocks and towards seemingly safer investments. Sgro pointed to large-cap names in the space ZScaler, Cloudflare and Okta, which year-to-date have dropped by 52 per cent, 57 per cent and 75 per cent, respectively, compared to the broader S&P 500 and Nasdaq which are down 19 and 30 per cent, respectively.
Sgro said investors will ultimately benefit from owning a stake in cybersecurity.
“Our view is that the long-term growth prospects for [cybersecurity equities] are strong and we expect cybersecurity to be more defensible than less critical areas of the enterprise tech stack,” he said.
From the Canadian perspective, Sgro highlighted five public equities that offer cybersecurity software or IP as part of their core business strategy: OpenText, Absolute Software, BlackBerry, Plurilock Security and Magnet Forensics, the last of which is in Eight Capital’s coverage universe. As for companies with cybersecurity business within their wider framework, Sgro pointed to three under Eight Capital’s coverage in WELL Health Technologies, Converge Technology Solutions and Quisitive Technology Solutions. Note: all projected returns listed below are as of the publication date of Eight Capital’s report.
Stock: Magnet Forensics (Magnet Forensics Stock Quote, Charts, News, Analysts, Financials TSX:MAGT)
Target Price: $35.00
Projected one-year return: 32 per cent
Sgro said Magnet is a leader in the niche digital forensics market, which makes up the reactive/responsive end of cybersecurity.
“The company has impressive software fundamentals to support our positive view, including being through the Rule of 40 showcased by our estimates for 33 per cent revenue growth and 15 per cent adj. EBITDA margins in 2022,” Sgro wrote.
Stock: Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS)
Target Price: $11.00
Projected one-year return: 97 per cent
“Converge has been building out and strengthening its cybersecurity team via organic efforts and strategic M&A. The recent acquisition of CBI added over 60 security engineers and tripled the size of the company’s security practice,” Sgro wrote. “Across the company’s broad North American platform, Converge provides strategic consulting and incident response, among other services.”
Stock: WELL Health Technologies (WELL Health Technologies Stock Quote, Charts, News, Analysts, Financials TSX:WELL)
Target Price: $10.00
Projected one-year return: 242 per cent
“From assessments, to consulting work, to managed services, WELL has been active in fortifying its customers’ networks, email, and application security. In the company’s recently released 2021 ESG report, safeguarding patient data was highlighted as a top three priority for the company,” Sgro said.
Stock: Quisitive Technology Solutions (Quisitive Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSXV:QUIS)
Target Price: $1.75
Projected one-year return: 197 per cent
“As an exclusive and leading Microsoft partner, Quisitive benefits from Microsoft’s platform approach to cybersecurity, which spans solutions including IAM, application, data, and other forms of security. The company’s SpyGlass offering, which was acquired in the Catapult transaction (link to our note here), provides a framework for a managed, proactive, continuous approach to optimizing security environments,” Sgro wrote.
Disclosure: Nick Waddell and Jayson MacLean own shares of WELL Health Technologies and WELL is an annual sponsor of Cantech Letter.