Morgan Stanley

Cybersecurity companies are developing new ways to block attacks at different stages in a system. Some of them could be compelling long-term investment opportunities.

As the number and sophistication of targeted cyberattacks grows each year, the array of security technologies to block attacks has also advanced. Each of the four main cybersecurity subsectors aims to thwart attacks at different stages—including after an attack has already breached a firewall.

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Not all subsectors are fast-growing, but several may be compelling investment opportunities to integrate into a technology portfolio. Total cybersecurity spending is estimated at $123 billion a year now and projected to grow 12% annually through 2022.1 With seven billion devices connected to the Internet now, up from 200 million in 2000, there are more points of vulnerability each year. Much of the fastest cybersecurity growth is in technologies that contain threats and limit damage, rather than perimeter defenses, like firewalls, that aim to keep them out.

Here are the four main subsectors of cybersecurity and where we see the most annual spending growth and opportunity over the next four years:

  • Defend: 8% spending growth. These traditional defense technologies, such as firewalls and security on employee laptops and cell phones, aim to block intruders from communicating with a company’s internal network. But, just as stronger cannons rendered castle walls obsolete, firewalls, too, can be foiled. For example, hackers can collect employee passwords via phishing attacks, then install malware to penetrate a system. Companies still need firewalls, but most have already invested in perimeter defenses, leaving less room for growth in this sector.

  • Detect: 10% growth. These technologies come into play when a hacker has penetrated a company’s perimeter defenses. The attacker can then communicate remotely with a network, stealing data or attempting to infect more devices. Companies rely on programs that look for suspicious network traffic and can also preemptively test applications to identify a breach before it has been exploited. Companies upgrading legacy systems with more advanced technology could fuel significant growth in this subsector.
  • Protect: 11% growth. These crucial programs can prevent hackers from gaining authorization to tap into the most sensitive data and assets during an escalated attack where an intruder has gained access to privileged applications. Investors need to be selective among these access-management vendors, given more opportunity in protecting assets stored in the cloud rather than on company premises. Cloud security software, in particular, is expected to grow 15% annually, much faster than the 6% for traditional data-loss protection and access-management tools.
  • Respond: 19% growth. Response and recovery technologies are the last phase halting an attack—when a data breach has occurred—and represent the highest forecast growth opportunity in the industry as a whole. Data breaches are up fourfold since 2016, with over four billion records breached.2 Some response companies run forensics to analyze an attack and trace its origins. Others clean and restore infected devices and data. Some of the most promising opportunities aim to help understaffed cybersecurity teams investigate and respond to attacks. Merger and acquisition activity is driving growth in this subsector, as companies seek to integrate the response technologies into a single cybersecurity suite. Insurance against cyberattacks is a key aspect of recovery and expected to grow 25%. For investors, however, there isn’t an obvious cyber-insurance pure play, so we include it in the respond phase.

Understanding the drivers of cybersecurity growth, vs. areas where growth is slowing or subject to technological disruption, can help investors identify the best opportunities within the constantly evolving cybersecurity ecosystem.

This article draws on analysis in the September 2019 Alphacurrents report, “Not Your Father’s Cybersecurity: Exploring an Industry in Transition,” by Senior Investment Strategist Scott Helfstein and Market Strategist Ian Manley. Please contact your Morgan Stanley Financial Advisor (or find one using the FA locator below) to see the full report and learn about opportunities to invest.