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Theme basket review: Cyber security consolidation at full speed
Summary: Russia's decision to invade Ukraine has created tailwinds for cyber security stocks on top of those that were already structurally in place as the number of cyber-attacks have increased dramatically forcing companies and government to increase their cyber security defence. In our annual review of our basket we have replaced four stocks due to number of acquisitions as the industry consolidating fast these years.
Cyber security is rising on Russia’s invasion of Ukraine
Our cyber security theme basket is up 7.5% in February driven by a whopping 3.7% gain yesterday as investors are rotating into equities that provide upside or hedging capabilities in an inflationary environment with added geopolitical risks. The industry was already accelerating in terms of growth before the invasion of Ukraine with the median revenue growth in the basket being 20.2% y/y with the median operating margin at -6.7% over the past 12 months. This is still an industry that is growing fast and prioritizing growth over profitability.
Since the invasion of Ukraine companies and governments have increased their spending on cyber security to be prepared for any cyber-attack. According to this Forbes article, the number of Russian-sourced cyber-attacks increased 800% in the immediate 48 hours after the invasion started, and key government infrastructure in the US has been put on high alert.
| Name | Market Cap (USD mn.) | Sales growth (%) | Operating margin (%) | Diff to PT (%) | 5Y return % |
| Palo Alto Networks Inc | 58,524 | 28.4 | -6.7 | 4.6 | 410.1 |
| Fortinet Inc | 55,404 | 28.8 | 19.5 | 4.5 | 837.7 |
| Crowdstrike Holdings Inc | 44,769 | 68.8 | -10.5 | 38.6 | NA |
| Zscaler Inc | 33,501 | 60.4 | -31.4 | 36.5 | NA |
| Cloudflare Inc | 37,675 | 52.3 | -19.5 | 33.6 | NA |
| Okta Inc | 28,440 | 50.0 | -52.7 | 44.8 | NA |
| VeriSign Inc | 23,545 | 4.9 | 65.3 | 18.2 | 155.6 |
| Splunk Inc | 18,753 | 10.6 | -45.9 | 37.4 | 88.4 |
| Check Point Software Technologies Ltd | 19,240 | 4.9 | 41.9 | -6.1 | 46.1 |
| NortonLifeLock Inc | 16,872 | 10.4 | 41.5 | -5.5 | 83.8 |
| F5 Inc | 12,199 | 10.8 | 14.6 | 21.8 | 41.3 |
| SentinelOne Inc | 11,077 | 100.2 | -124.1 | 54.5 | NA |
| Avast PLC | 8,757 | 5.4 | 41.9 | -12.2 | NA |
| Trend Micro Inc/Japan | 8,288 | 9.4 | 22.9 | -0.2 | 55.3 |
| CyberArk Software Ltd | 6,765 | 8.3 | -15.6 | 19.2 | 234.7 |
| Rapid7 Inc | 6,009 | 30.1 | -22.4 | 26.9 | 600.9 |
| Tenable Holdings Inc | 6,077 | 22.9 | -7.7 | 19.7 | NA |
| Qualys Inc | 4,891 | 13.3 | 21.3 | 11.6 | 259.6 |
| Varonis Systems Inc | 4,688 | 33.3 | -25.3 | 35.4 | 367.1 |
| Sailpoint Technologies Holdings Inc | 3,882 | 20.2 | -13.3 | 40.9 | NA |
| Venustech Group Inc | 3,580 | 45.8 | 17.2 | 54.3 | 14.5 |
| Darktrace PLC | 4,214 | 41.3 | -13.7 | 76.9 | NA |
| CommVault Systems Inc | 2,803 | 8.3 | 5.4 | 21.8 | 27.9 |
| Radware Ltd | 1,583 | 14.6 | 6.4 | 13.3 | 120.2 |
| F-Secure Oyj | 895 | 7.3 | 7.5 | 13.5 | 61.5 |
| Aggregate / median | 400,784 | 20.2 | -6.7 | 21.8 | 104.3 |
The industry is undergoing a rapid consolidation with Proofpoint being acquired by the private equity firm Thoma Bravo last year and Microsoft recently going after Mandiant (formerly FireEye), and Avast is being acquired by NortonLifeLock. In addition, McAfee is being taking private by a group of investors. The industry is rapidly evolving technologically and in terms of complexity, and as a result we expect the consolidation to continue with the industry ending up being dominated by 4-5 companies sitting 80% of the combined revenue in the industry.
The stocks that have been removed due to acquisitions or otherwise are:
- Mandiant (because we expect Microsoft’s acquisition to go through)
- McAfee
- Mimecast
- SolarWinds (reviewed this company and it is not pure enough cyber security)
Avast is being kept in the portfolio for now but the acquisition by NortonLifeLock will most likely go through in April and at that point we will update the basket again.
The stocks we have added are:
- SentinelOne
- Darktrace
- Radware
- F-Secure
Darktrace and F-Secure increases the geographical exposure a bit away from an otherwise very US-centric basket.