I’ve been getting increasingly anxious about my digital presence lately. I bank, shop, relax and work entirely online. My business bank account details are linked with an app I use on my smartphone that connects automatically to the WiFi at the local public library. It wouldn’t take much for someone to break in and get all my details.
Personal and business data like this can be used to steal my identity and apply for loans that are never paid back, ruining my credit history. Or lock down the data on my business computer until I paid a ransom to retrieve it. All it would take is an ill-fated click on a malicious link in a seemingly innocuous email.
That’s the threat we all live with in the digital age. As these attacks grow more common and sophisticated, cybersecurity firms have been creating solutions that could help ordinary people and small businesses mitigate the risk. It’s an industry that could be worth as much $248.26bn (£200bn) by 2024, according to data published on Statista.
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Experts say demand for cybersecurity tools could expand at 11% every year for the next half-decade. That sounds to me like an attractive growth industry. Fortunately, there seem to be two tickets to this lucrative ride listed on the London Stock Exchange:
Avast
With over 435 million users spread across the globe, antivirus maker Avast (LSE: AVST) is probably one of the biggest cybersecurity firms on the planet. The company’s primary focus is the consumer security market. It offers a free antivirus option that can be updated with better security features at a premium price.
According to the company’s latest report, 95% of annual revenues are derived from consumers, with the rest originating from small and medium-sized businesses. Over the first half of 2019, billings, revenue and free cash flow were up 12.5%, 9.2% and 20% respectively. Meanwhile, net margin expanded to a hefty 34.7% this year.
Despite those impressive figures, the stock seems to be flying under the radar at the moment. Avast shares trade at a forward-price-to-earnings ratio of just 13. There’s no doubt I’ll be watching this one closely.
Sophos
Sophos Group (LSE: SOPH) is a considerably smaller company with a higher valuation than Avast. However, the company is focused on enterprise customers rather than the average consumer.
Businesses, arguably, have more at stake than the average internet user. Medical records, trade secrets, client information and financial transactions all need to be protected with a higher degree of sophistication. This complexity makes enterprise security solutions more expensive to execute, but also more sticky.
Sophos strikes long-term subscription contracts (average length of 26.4 months) with its clients and reported strong customer retention over the past year. However, Sophos lost money last year and swung to a tiny profit (net margin 4%) this year.
After losing 40% of its value over the past 18 months, it could be argued that the stock is trading at a better valuation. However, a P/E ratio of 70 and razor-thin margins are still concerns for me.
If the valuation improves, I could add Sophos alongside Avast to create a portfolio that adequately covers both the consumer and enterprise segments of the global cybersecurity market.
Foolish takeaway
Cybersecurity is a quickly expanding and highly lucrative market. I’ll be monitoring Sophos and Avast closely for a chance to add exposure here.
