Morgan Stanley
  • Wealth Management
  • Aug 25, 2022

Megatrends: Opportunities on the Front Lines of Cybersecurity

The cybersecurity sector is rapidly growing and developing new ways to guard against sophisticated attacks. How can you take advantage of the long-term investment opportunity?

The number and sophistication of cyberattacks have been growing for years, spurred by the rise of big data, cloud computing and remote work. With more data being accessed from more places than ever before, the complexity of securing digital systems has increased exponentially. The result: strong and growing demand for security services that could boost cybersecurity-related stocks for years to come.

Strong and growing demand for security services could boost cybersecurity-related stocks for years to come.

These trends may offer some of the most compelling long-term investment opportunities in technology today. This includes both a growing array of cybersecurity providers and, increasingly, defense companies seeking to bolster their cyber capabilities amid mounting threats from abroad.

Here’s a closer look at the key factors we see driving this technology megatrend and how investors can benefit.

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More Data, More Access, More Risk

As the world creates more data and accesses networks in more ways, cybercriminals find new vulnerabilities to exploit. The number of significant cyberattacks has increased from just four major incidents in 2006 to a peak of 134 in 2020.1 As the number of attacks has grown, so has the cost to the victims. IBM found that the average cost of a data breach in the U.S. has grown from $3.5 million in 2006 to $9.4 million in 2022, a nearly 170% increase in 16 years.2

Major cyberattacks have increased significantly
Significant Cyberattacks

Note: Significant cyberattacks are defined as cyberattacks resulting in more than $1 million in damages.
Source: Center for Strategic and International Studies, Morgan Stanley Wealth Management Global Investment Office as of Dec. 31, 2021.

The nature of cyber threats has also evolved. In the past, cybercriminals often focused on stealing personal information, such as credit card data and Social Security numbers. While such threats are still present, major cyberattacks today are increasingly being conducted by geopolitical adversaries like China, Iran, North Korea and Russia, and often focus on shutting down critical supply chains and infrastructure, such as the U.S. power grid.

Cybersecurity Providers May Be Poised for Growth

Ultimately, the ever-growing threat of cybercrime is driving opportunity for cybersecurity providers. Morgan Stanley Research estimates that total direct revenues at security software vendors eclipsed $45 billion in 2020, expanding at a 12% three-year compound annual growth rate—making security one of the fastest-growing subsectors within technology.

That growth is likely to continue in the coming years. In a recent survey of corporate chief information officers, Morgan Stanley Research showed cybersecurity spending appears poised to grow faster than other software categories. It’s also likely to be more resilient at a time when broader technology budgets could come under pressure, with respondents pointing to a lower likelihood of security spending cuts, compared to other areas in software. 

The Investment Opportunity in Cybersecurity

For investors interested in exploring how their portfolios can benefit from strong secular growth in the cybersecurity and defense industries, there are several approaches to consider.

For example, thematic exchange-traded funds (ETFs) can provide broad exposure to both U.S. and global companies focused on providing network protection.   


Alternately, if you are interested in pure-play single-stock investments, consider companies working in three areas:

  • Endpoint security providers have traditionally focused on protecting a network’s perimeter by securing entry points across connected devices, such as computers and cell phones. Solutions in this industry subsector have evolved from traditional antivirus software to comprehensive protection from sophisticated malware.
  • Network security vendors aim to protect the users, data and apps within a network’s perimeter, minimizing access rights and duration to reduce overall information-security risk within the system.
  • Defense and aerospace firms are increasingly integrating cybersecurity within their products, as heightened geopolitical risks blur the lines between cybersecurity and national defense. This could strengthen the secular investment opportunity among companies involved in cybersecurity, such as traditional defense contractors.

While cybersecurity remains one of the most compelling secular growth opportunities in technology today, it’s worth noting that this opportunity has not been lost on the market. In fact, the sector has outperformed its software peers in recent years, and valuations remain above pre-COVID levels. Investors should keep in mind that still-elevated valuations may make the sector susceptible to more downside if macro pressures persist. Look to selectively add exposure to cybersecurity stocks when valuations weaken.

Interested in learning more? Ask your Morgan Stanley Financial Advisor for a copy of the AlphaCurrents report Cybersecurity: Secular Opportunity Amid Cyclical Weakness—and talk to your Financial Advisor about how you can potentially benefit from investing in cybersecurity.

Questions You Can Ask Your Morgan Stanley Financial Advisor:

  • How can I gain exposure to growth in the cybersecurity industry in ways that fit with my long-term investment goals?
  • What are some ways to invest in specific cybersecurity providers and/or defense companies bolstering their cyber capabilities? 

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