Analysts at Bank of America Merrill Lynch have looked at the investment landscape and divided it into five broad categories that they have called “A Transforming World.” They have just released an update to their quarterly overview of Buy-rated names with material exposure to three transformative investment themes. The firm calls these Primer Picks.
One of their thematic overviews comes in the broad category of Innovation and includes an overview of several technologies, including cybersecurity, future mobility, robots and artificial intelligence, smart cities and virtual, augmented and mixed reality.
Here we take a look at the analysts’ view of the cybersecurity market and at some of their Primer Picks in the sector.
Merrill Lynch commented on several aspects of the cybersecurity sector:
It’s not safe out there! It’s an unsafe world for all of us – Every year 2.3mn people are killed at work (Source: ILO), 1.3mn lose their lives in road accidents, and 15,000+ die in terrorist attacks (Source: NCTC). Globalisation is driving the need for safety and posing new challenges from EM growth to outsourcing, the food supply chain, a degrading environment, and new diseases. We believe some corporates may push the boundaries of safety in their efforts to exploit new resources.
Cybersecurity: one of the top global risks today: 90mn+ attacks per year – There are 80-90mn+ cybersecurity events per year, with close to 400 new threats every minute, and up to 70% of attacks going undetected. All companies are being hit: finance & insurance is the most targeted sector, followed by ICT, manufacturing and retail. Cybersecurity has become a homeland security threat with rapid growth in attacks against critical infrastructure and manufacturing. Americans worry about falling victim to cyberattacks more than any other type of crime – with 1bn data records compromised in the US alone in 2014. We believe cybersecurity poses a key threat to the three pillars of creative disruption: the Internet of Things (IoT), the Sharing Economy and Online Services.
“Cybergeddon”: up to US$3tn in economic impacts – The average cost of cybercrimes for US companies reached a record US$12.7mn in 2014, with cybercrime costing the global economy up to US$575bn annually. Cyberattacks are the #1 source of economic assaults against governments, and the #1 source of IP theft for corporates. The rise in disruptive technologies – including IoT with 50bn+ devices connected to the internet by 2020 – means that we are facing a potential worst-case “Cybergeddon” scenario where the ‘bad guy’ has the permanent advantage. Cybercrime extracts up to 20% of the value created by the internet, meaning that as much as US$3tn of global economic value could be at risk by 2020E.
Investors need to play safe: Public opinion has become more sensitive to issues of quality, security, health & safety, environmental protection and social responsibility, which has led to the proliferation, strengthening and convergence of regulation and the development of non-regulatory standards. As a result, corporates are increasingly being forced to adapt to new best practices on safety & security. We believe that investors need to focus on this shift and look for long-term solutions to the ever-growing raft of threats against people, governments, infrastructure and society as a whole.
Merrill Lynch identifies eight entry points for investors in a market they estimate will reach $1.5 trillion by 2020:
- Commercial and residential
- Life sciences
- Oil and gas
- Testing, inspection and certification (TIC)
Among the analysts’ Primer Picks are FireEye Inc. (NASDAQ: FEYE), Checkpoint Systems Inc. (NYSE: CKP), Palo Alto Networks Inc. (NYSE: PANW), Splunk Inc. (NASDAQ: SPLK), Fortinet Inc. (NASDAQ: FTNT) and Barracuda Networks Inc. (NYSE: CUDA). These stocks are all listed as having High exposure to the cybersecurity outlook.