Is cyber security the next big growth industry?

As certain major technology firms are struggling, a sub-sector of the industry is on the rise.

“Cyber security companies are producing and providing essential services,” says Raj Lala, president and chief executive officer of Evolve ETFs. “They’re not producing a smartphone or a social media application, so they’re very different from the FAANG stocks out there. What they’re really doing is creating the hardware, the software and the consulting services that are protecting all the largest companies in the world, as well as government agencies globally.”

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The 2017 Equifax data breach serves as an example of why companies must have protection from cyber threats, says Lala. “It wasn’t so much the number of records that were breached, . . . it was the quality of the data that was accessed. So it was not just the username and things like that, but financial data about the individual, their address and so on. And once Equifax reported that, their stock dropped that following week by 35 per cent. And it’s still down that much today . . . . You spend millions of dollars to build [customer] trust and tens of years, but you can lose it very quickly.”

In Lala’s discussions with Canadian banking executives, their primary concern is a cyber threat. “I’ve heard CEOs of Canadian banks say a cyber breach is the one thing that really keeps them up at night. And oftentimes, the first thing they do in the morning is message their chief technology officer to make sure everything is OK.”

As markets enter a period of increased uncertainty, there’s lots to like about the cyber security space, says Phil Young, assistant vice-president and senior analyst at Cidel Asset Management Inc. Cyber security equities are a good defensive play since companies are unlikely to cut spending on those protective measures, he says, noting companies are actually increasing their budgets in this area for a number of reasons.

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Data breaches can cause significant financial losses and public relations disasters for the affected companies, he says. As well, increasing compliance requirements are pushing firms to ensure they have better systems to protect their data.

Further, more data requiring that protection exists than ever before. “When we think about the space, there’s this massive increase in customer data being generated by all types of different businesses,” says Young. “And while that data is absolutely an asset, it’s also a liability because more data means more risk and you need to protect that with cyber security.”

As a growth theme, Scott Knight, senior portfolio manager of international and U.S. equities at Addenda Capital Inc., says he’s been following cyber risk for some time. “The market size was about $120 billion last year and is expected to double in perhaps the next three to five.”

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While companies are becoming more digitally friendly, the number of devices regularly used is also on the rise, as are the number of potential vulnerabilities, he says. “C-suite executives lost their jobs over issues like this and nothing gets them interested faster.”

Expertise in the sector is being sought out rapidly, with executive teams adding chief security officers, says Knight. “What this means is a flurry of spending and we’ve seen a frenzy of activity where people went out and bought a number of different solutions.”

The threat, he adds, is very real. “The hackers are extremely well-funded and extremely innovative. They’re going to exploit any vulnerabilities they can find, rather than focus on one thing you could protect against uniformly.”

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