Investing in ASX cybersecurity shares

Cybersecurity spending has soared since the onset of the COVID-19 pandemic in early 2020. Cloud computing and remote work have presented new security challenges that organisations have turned to cybersecurity companies to solve. 

What are ASX cybersecurity stocks? 

ASX cybersecurity stocks are shares in companies that provide cybersecurity solutions and defences. Cybersecurity companies protect customer networks and digital assets from the threat of cybersecurity attacks via hardware, software, and services. 

Cybersecurity businesses block online threats, assess vulnerabilities, and educate customers about maintaining cybersecurity. Our increasing reliance on cloud computing and the internet of things leaves Australian businesses vulnerable to cybersecurity threats. There is an ever-expanding volume of valuable data stored in the cloud. Keeping this data secure is critical. 

Legislative penalties for data breaches are growing as hackers increasingly target personal information. This means the cybersecurity sector will likely continue to grow for some time.

However, developing a sustainable competitive advantage is not easy for a cybersecurity company because the nature of the threat is constantly evolving.

Nonetheless, technology-savvy ASX investors are looking to cash in on the cyber security theme. 

Why invest in ASX cybersecurity shares? 

Demand for cybersecurity products is growing as the financial and reputational consequences of data breaches, malware, and ransomware become increasingly apparent. Global cybersecurity spending is expected to exceed $172 billion this year and continue to grow at a healthy rate for years to come.¹ 

Many companies lack the internal expertise to secure their IT assets, so increasingly rely on outsourced vendors to provide digital defences against cyber threats. The shift to working from home spurred by the COVID-19 pandemic has highlighted the importance of cybersecurity, leading to expansion in the global cybersecurity sector. 

A cyber attack can significantly interrupt or shut down business operations and critical infrastructure. The World Economic Forum’s 2021 Global Risks Report ranked cybersecurity failure as the fourth likeliest critical threat to the world within the next two years.² 

The issue is that the infinite ways to attack a computer network make infallible security impossible. 

As the focus on protecting computers, networks, programs, and data from a breach increases, demand for cybersecurity solutions also increases. 

Top cybersecurity stocks on the ASX

(based on market capitalisation from high to low)

Family Zone Cyber Safety 

This company offers online safety technology that incorporates school and parental controls. Family Zone Cyber Safety products include

• an education-focused filtering and reporting program
• a teacher dashboard providing screen visibility of all devices in class
• a proactive monitoring tool to help schools detect online and offline risks. 

The company reaches 12 million students, with 38% of United Kingdom schools and 16% of United States school districts using its products. 

In FY22, Family Zone grew the number of schools serviced by 316% and the number of students serviced by 300%. The average revenue per student increased by 14%, with the gross margin up from 61% to 82%. The company ended FY22 with $61 million in annual recurring revenue (ARR) and net revenue retention of 132%. 

Growing awareness and new regulation is driving an expansion of the addressable market. Funding of edu-tech and safety-tech is growing as the well-being of young people immersed in a digital world gains more attention. The outlook for FY23 is strong, with a $12 million educational pipeline and tailwinds as digital safety becomes a focal point for parents and educators. 

Tesserent

Integration of several high-quality cybersecurity businesses has made Tesserent Australia’s largest listed dedicated cybersecurity firm. The company provides full-service, enterprise-grade cybersecurity and networking solutions to customers across Australia and New Zealand. A 30-year veteran of the tech industry, Tesserent is the largest provider of cybersecurity services to the Australian Government. 

Tesserent delivered record turnover and growth in earnings before interest, tax, depreciation, and amortisation (EBITDA) for FY22. Overall growth comprised both organic growth and acquisitions. ARR has continued to grow and now represents 46% of group turnover. 

The company was recently awarded a contract to provide a secure digital archiving solution to the State Library of Queensland following its partnership with the State Library of New South Wales. 

For the five months to November 2022, Tesserent has reported turnover of $70 million, a 35% increase on the prior comparative period. Against the backdrop of recent high-profile data breaches, the company has recorded significant growth in its sales pipeline over the last few months. 

Prophecy International Holdings 

Prophecy designs and develops innovative software solutions, including security and compliance products (Snare). These range from small footprint, highly effective device and network logging and log-management tools to advanced IT infrastructure threat protection solutions. 

The company achieved strong growth across key sales metrics in FY22, with a 41% increase in new sales and a 71% increase in ARR. Snare achieved new business sales of $6.7 million for the year, with new subscription sales of $1.75 million. Prophecy focuses on key markets in the United States, United Kingdom, and Europe for Snare, driving strong continued sales and pipeline growth. 

In FY22 Prophecy signed more than 340 new Snare sales contracts with enterprise customers and governments across five continents. The company has a positive view for continued growth, with the market for flexible cybersecurity and compliance solutions continuing to grow. 

What might the future hold for ASX cybersecurity shares? 

Recent high-profile data breaches in Australia have drawn increased attention to cybersecurity. Computer security remains a priority for Australian corporations and governments. Government initiatives could boost the sector, with the Home Affairs Department recognising the importance of cybersecurity for Australia’s national security, innovation, and prosperity. 

Revenue in the Australian cybersecurity market is expected to grow at a compound annual growth rate of 11% from 2022 – 2027, reaching US$5.83 billion by 2027.³ In the US, the sector is becoming a target for private equity, with demand both from financial sponsors and strategic buyers. 

The use of cybersecurity is a practicality that every business must face to ensure the success of digital operations. Increasing awareness of data risks and threats is providing tailwinds to the sector, which has seen robust growth over the last few years. Increasing internet penetration in developing countries will further drive the adoption of cybersecurity solutions. 

Pros of investing in cybersecurity shares 

Increased need for cybersecurity: As the digital economy grows, more and more businesses need cybersecurity solutions to protect their systems. This means demand for products and services offered by ASX-listed cybersecurity companies looks set for ongoing expansion. 

Constant evolution: Hackers are continually coming up with new ways of breaching defences and exploiting weaknesses in software and infrastructure. This means Australian companies in the cybersecurity space must constantly update their offerings to ensure adequate performance, especially with the growing complexity of technology.

And the cons…

Competition: Cloud computing giants such as Microsoft Corp (NASDAQ: MSFT) are muscling into the cybersecurity sector with their own offerings and marketing deals. 

Volatility: Cybersecurity shares can be volatile. A subsection of the wider technology sector, the share prices of cybersecurity stock have the potential to fluctuate to a greater extent than the broader stock market.  

Are ASX cybersecurity stocks a good investment?

Whether ASX cybersecurity shares are a good investment for you will depend on your investment style and goals, risk tolerance, and financial situation. While the growth potential for ASX shares in the cybersecurity sector is substantial, not all cybersecurity stocks will be winners. 

Additionally, ASX stock in cybersecurity companies can be volatile, and technology shares often trade on high multiples. Picking individual investments in the cybersecurity sector requires a careful risk analysis that considers expected returns, volatility, management strategy, and competitive positioning. 

An exchange-traded fund (ETF) such as Betashares Global Cybersecurity ETF (ASX: HACK) may be suitable for Australian investors wanting exposure to the broader cybersecurity industry.