Many investors are interested in the cybersecurity sector. As more data and applications migrate to the cloud, it's obvious that governments and companies are going to have to spend more on security. While cloud computing means organizations can be leaner and more powerful, it also means that they are more vulnerable.
Every so often this becomes clear as there is some high-profile hacking incident. The latest is with SolarWinds (NYSE: SWI), an IT provider for the federal government and many Fortune 500 companies. Victims of the hack include the US Treasury Department, Department of Commerce, and the National Telecommunications and Information Administration (NTIA).
Russian Involvement
Secretary of State Mike Pompeo fingered Russian hackers, linked to Russian foreign intelligence, as being responsible. According to reports, malware was a part of recent software updates for SolarWinds' Orion platform which is used to monitor all IT resources on a network.
Through the malware, hackers had access to internal, sensitive emails at government agencies and companies. However, the full scale of the breach is unknown. Currently, the FBI's cybersecurity department is investigating, although the hack was considered serious enough to prompt a National Security Council meeting.
Stock Price Outlook
The hack resulted in SolarWinds' stock dropping by nearly 50% in a couple of sessions as it could seriously imperil its current and future contracts. On the other hand, it caused a big move higher in cybersecurity stocks. The PureFunds ISE Cybersecurity ETF (NYSE: HACK) gained 14% in the days following the news.
One of the premier cloud security companies - FireEye (Nasdaq: FEYE) was up 80% following the news. It's likely that the SolarWinds hack could result in companies and governments increasing their spending on cloud security as this could be the point of maximum vulnerability.
While cybersecurity stocks could pullback in the short-term given how overbought they are, it's likely that they will be one of the best-performing groups over the next couple of years. Spending on cybersecurity is expected to grow between 12 and 15% annually over the next decade.
Additionally, cybersecurity products tend to be similar to a lot of SaaS (software as a service) products in that they are high-margin which tends to lead to high multiples. Crime and battles between countries are increasingly digital like so many aspects of life, so the importance of securing these channels will only increase. Investors should keep these stocks on their radars.