Investing in ASX cybersecurity shares

Cybersecurity stocks are responsible for the safety of their client's digital assets, playing a critical role in protecting businesses from cyber threats. 

Cybersecurity spending has grown in recent years. Cloud computing and remote work have presented new security challenges, and organisations have increasingly turned to cyber defence companies for solutions. 

What are ASX cybersecurity stocks? 

ASX cybersecurity stocks are shares in companies that provide cybersecurity solutions and defences. Cybersecurity companies protect customers' 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 remote working leaves Australian companies and government organisations particularly vulnerable to cybersecurity threats. 

An ever-expanding volume of valuable, sensitive data is being stored in the cloud and transmitted over the internet. Keeping this data secure is critical for businesses and governments. Not only does it threaten their business operations, but data leaks and breaches can inflict significant reputational damage. 

Legislative penalties for data breaches are growing as hackers increasingly target individuals' 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. This can make it a risky sector to invest in.

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

Why invest in them? 

Demand for cybersecurity products is growing as the financial and reputational consequences of data breaches, malware, and ransomware become increasingly apparent. Global cybersecurity spending for the period 2021 to 2025 is estimated to be as much as a whopping US $1.75 trillion.¹ 

Many companies lack the internal expertise to secure their IT assets, so they 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. And it takes ongoing vigilance and round-the-clock monitoring to remain protected. 

The issue is that there are infinite ways to attack a computer network. Hacker strategies change constantly, ensuring that demand for cybersecurity services can only increase. 

Top cybersecurity stocks on the ASX

(based on market capitalisation from high to low)

Qoria 

Recently rebranded from Family Zone Cyber Safety, Qoria offers online safety technology for children, that incorporates school and parental controls. The company's 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 20 million students in 25,000 schools, with 38% of United Kingdom schools and 19% of United States school districts using its products. The company earns significant annual recurring revenue (ARR) from ongoing school contracts.

Growing awareness and new regulations are 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. Qoria aims to become the global leader in children's digital safety and well-being within three years. 

FirstWave Cloud Technology

With a client list boasting global businesses like Microsoft Corp (NASDAQ: MSFT), NASA, and Telstra Group Limited (ASX: TLS), FirstWave is already a successful cybersecurity business. Originally founded in 2004 in Sydney, FirstWave has now expanded globally. 

FirstWave isn't afraid to expand through acquisitions, either. It recently snapped up IT and network management company Opmantek for $62 million. FirstWave claims organisations use Opmantek software in 178 different countries.

FY23 revenues increased 34% year-on-year to $12.5 million, while gross profit rose 56% to $9.63 million. The company has also been delivering on its cost-saving initiatives. In its most recent quarterly report, FirstWave announced annualised cost savings of $1.5 million from personnel restructuring.

Prophecy International Holdings 

The smallest company on this list, with a market cap of just $40 million, Prophecy is a software developer that designs innovative security and compliance solutions. Its flagship product is Snare – network audit and security software originally designed with the help of the Australian military.  

Prophecy has been around for decades, starting life in the 1980s as an accounting software developer. It morphed over the years and, by the early 2000s, had started acquiring new products (including Snare). Prophecy's other key product, eMite, provides data analytics solutions to help businesses increase productivity and customer and staff satisfaction.

The company achieved solid growth across key sales metrics in FY23, with a 19% increase in revenues and a 26% increase in ARR. Snare achieved new business sales of $5.3 million for the year, with 274 new contracts signed with enterprise customers and governments globally. 

Prophecy focuses on key markets in the United States, United Kingdom, and Europe for Snare, driving strong continued sales and pipeline growth. 

What might the future hold for cybersecurity in Australia? 

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 9% from 2023 – 2028, reaching US$5.6 billion by 2028.² In the US, the sector is becoming a target for private equity, with demand both from financial sponsors and strategic buyers. 

Cybersecurity is a practicality that every business must face to ensure the success of digital operations. Increasing awareness of data risks and threats provides 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 developing 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 broader technology sector, the share prices of cybersecurity stock have the potential to fluctuate to a greater extent than the overall stock market.  

Are ASX cybersecurity shares 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 price-to-earnings (P/E) multiples. Selecting individual investments in the cybersecurity sector requires analysis that considers expected returns, volatility, management strategy, and competitive positioning. 

If you don't have the spare hours to spend researching the cybersecurity industry but are still seeking some exposure to this theme, an exchange-traded fund (ETF) such as Betashares Global Cybersecurity ETF (ASX: HACK) could be a great option. This crypto ETF will provide diversified exposure to a portfolio of companies operating in the cybersecurity industry in just one trade.

• Additional reporting: Rhys Brock