Industry Deep Dive: Cyber Security

HOSTS Alec Renehan & Bryce Leske|7 September, 2020

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

In today’s episode we take a look at the fast growing cyber security industry. There’s a lot of reasons to like this industry. With more and more of our infrastructure being electrified, and everything from our jobs to our social lives moving online, cyber security has never been more important. In the coming years, the internet of things will connect everything from our fridge to our car, and the advent of machine learning and artificial intelligence will only accelerate this trend.

With this context in mind, protecting critical infrastructure and networks has never been more important. There are a number of great companies (with not so great names…) that offer cyber security services to governments, businesses and individuals. In this deep dive we take a look at the industry, some of its key attributes and how you can invest in it.

In this episode you will learn:

  • The context for the cyber security industry
  • Some of the common cyber security risks
  • The story of notable cyber attacks
  • COVID’s impact on the cyber security industry
  • Why Bryce hates the name of many cyber security companies
  • How you can conceptualise the different players in the cyber security industry
  • The options to invest in cyber security – ETFs, cyber-related stocks and cyber security stocks
  • Some of the key risks to investing in the cyber security industry

For more, check out the cyber security deep dive on the Equity Mates website.


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Bryce: [00:01:28] Welcome to another episode of Equity Mates, the podcast, where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I am joined by my equity buddy Ren. How's it going, Bryce? [00:01:43][15.3]

Alec: [00:01:44] I'm very good Bryce. As always, I'm very excited for this episode where we're going to go deep on an industry that a lot of people are interested in and is becoming more and more critical, the infrastructure of the economy. And no, I'm not talking about buy now, pay later providers in Australia, but cyber security. [00:02:04][20.3]

Bryce: [00:02:05] That's right, Ren. We are taking a break from the hypothetical portfolio that we've been doing over the last few weeks and turning our attention to the industry Deep Dive segments that we often do over our break in some we [00:02:16][11.5]

Alec: [00:02:16] these companies over [00:02:18][1.6]

Alec: [00:02:18] some 2018 somewhere. I think we now know that. [00:02:23][4.9]

Bryce: [00:02:25] So we were doing cyber security, one of the hottest sectors that have come through from the Equity Mates community, you guys out there. So we've taken your feedback on board and we're going to pick apart everything that has to do with cyber security. Looking at a bit of the context, some of the major players in the space, obviously what the industry is, how it's investable, and then some of the ways that you are able to actually invest both here in Australia and overseas [00:02:49][23.8]

Alec: [00:02:50] before we get into that. You said we're taking a break from the hypothetical portfolio. I don't see this as a break. I say this as complementary. I say this as part of the Deep Dive is trying to understand that Australia is trying to figure out things. [00:03:03][12.9]

Alec: [00:03:03] Yeah, yeah, yeah. [00:03:04][0.5]

Alec: [00:03:04] I love doing these deep dives. I love learning about new industries and new companies and stuff like that. And I think what I want to do with the hypothetical portfolio is not just do individual stocks, but also, you know, talk about industries that are interesting and use that as a guide to then maybe talk about some companies at all. Sort of. You know, it's [00:03:22][18.3]

Alec: [00:03:23] it's a virtuous cycle. Yes. That's it's a fair point. But speaking of hypothetical portfolio, we continue to get some stock pictures. Come in, keep sending them in. We love to get them. And at the same time, if there's particular industries that you think have, you know, good tailwinds, there's some macro trends that might be making it an interesting place to invest. And you want to pick a particular industry is something that's interesting if you don't have a particular stock. But you just you know, just if you want to join the conversation, join the conversation on our Facebook group, you can email us. You can hit up Bryce on his personal tik-tok, Bryce Leskie. One, two, three. [00:04:00][37.0]

Alec: [00:04:01] That's right. Ren. No, not that's right. About my tik-tok Covid. [00:04:04][2.4]

Bryce: [00:04:05] Yeah. Look, we want any of you guys to come and join us on the show, so please just hit us up, be the mobile. It's as simple as a quick phone call and bang, you're going to be on the show. So to be [00:04:15][10.1]

Alec: [00:04:15] clear, [00:04:15][0.0]

Alec: [00:04:17] the initial contact is in by mobile. We haven't given out our mobile numbers yet, but we main we'll get you on the show by giving you a call. [00:04:24][7.0]

Alec: [00:04:24] I think that was pretty clear. I was included in that. So please listen [00:04:28][3.9]

Bryce: [00:04:29] to stock pitches and also to Ren point, even if you just have a trade idea or an investment thesis, whatever it may be, we want to hear about it. And we're looking forward to getting you all on the show. Don't be put off by Ben's amazing pitch, setting the bar high. Obviously, he's very ingrained in that investment environment. So, yes, it was an amazing pitch. But please, we're looking for all of you to come on and share your stuff. [00:04:50][21.2]

Alec: [00:04:50] So Bryce is just looking for people to keep pitching. So he never has to pitch. [00:04:54][4.2]

Alec: [00:04:56] Right? When I pitch, [00:04:57][0.8]

Bryce: [00:04:57] it's just going to be amazing. [00:04:58][0.9]

Alec: [00:04:59] Says he's going to build those expectations all around. [00:05:03][4.3]

Bryce: [00:05:04] So let's move on. Industry Deep Dive cybersecurity topical at the moment, we've just had the New Zealand Stock Exchange get has [00:05:12][8.1]

Alec: [00:05:12] they [00:05:12][0.0]

Alec: [00:05:13] could have used some more Sivas. [00:05:14][1.3]

Bryce: [00:05:15] Yes, they were down for three days. Four days, four days. Unbelievable. So, look, it's an industry that is growing very quickly. It's becoming very large. And there are a lot of companies that I've never heard of going through this process. Had you heard of many of them? No. [00:05:29][14.6]

Alec: [00:05:29] And I think that's going to be a really important through line through this episode. And actually, we should say right at the top and we'll probably repeat it throughout this episode as part of what we're trying to do with the industry Deep Dive. And also in terms of getting our website a bit more up to scratch and a bit more relevant, all of these notes, plus more will go into a written space on our website, an industry Deep Dive. There's a number of companies that were not going to spend a lot of time going through their market cap, their price to earnings, our revenue growth, just because, you know, Splunk and stuff like that. Palo Alto networks, like there's a bunch of companies that people wouldn't have heard of. And there's probably not a lot of value for us to just write a shopping list on a podcast. But there will be all of the companies that we talk about and plenty that we don't talk about in the show notes there'll be a link to it, or you can just head it to our website, Equity Mates dot com, because yet there's so many companies in this space, both directly related to cybersecurity and in. Directly involved in cyber security, infrastructure or, you know, ecosystem goes without saying it's obviously a big industry, [00:06:33][63.8]

Alec: [00:06:35] but [00:06:35][0.0]

Alec: [00:06:36] it's a it's a big industry that we don't have a lot of exposure to a lot of those individual companies on a day to day basis. So, yeah, it was it was pretty interesting to see what they do and what [00:06:47][10.5]

Bryce: [00:06:47] some of them were pretty fascinating. And it's also fascinating to see what companies are classified as in this space. But we'll get to that later. So context Ren. Yes. [00:06:54][7.6]

Alec: [00:06:55] Cyber space, the first truly manmade environment. Just not any of this, you know, real world, just shape for us. And look, if we start with the context, it almost goes without saying, but we're going to say it anyway. Like as more and more of our critical infrastructure is electrified, is moved online as the Internet of Things becomes more important, as more and more data is stored online, the risk of cyber intrusions and cyber hacks increases and the potential devastating effects of these intrusions and hacks and breaches becomes more and more pronounced. And so this has given rise to a large defensive industry to protect against those hacks. To give you some context, McKinsey looked at data fuelled applications of artificial intelligence and projected that they're going to generate 13 trillion dollars worth of new economic activity by 2030. So, like, not only is where we're up to in history, there is such a need for cyber security, but it's just going to keep increasing and it's going to increase at an exponential rate. So in terms of tailwinds for an industry, in terms of macro trends that you can invest with, there's probably no better industry than cyber or to be right at the top of the list. So to give some practical examples of some of the risks. You know, there's obviously the theft of personal information or data, which [00:08:27][92.0]

Bryce: [00:08:27] you try to do with my credit cards all the [00:08:29][1.4]

Alec: [00:08:29] time. [00:08:29][0.0]

Alec: [00:08:30] So that's obviously a big one. And there's been some really obvious examples of that. The US Department of Health and Human Services was hacked, which was ideal because it was a government database dash. The food delivery company had a security breach that exposed the personal data of almost five million customers, merchants, delivery workers. Equifax, the big credit reporting agency, got hacked and all their data got taken. But, you know, so many companies have had their data stolen. Every company from Target in the US to a database is just such a risk of losing that data and then fraud happening, credit card details being stolen, blah, blah, blah. That happened to you actually, didn't it? [00:09:09][38.5]

Alec: [00:09:09] Your Amazon or Amazon yesterday [00:09:11][1.8]

Bryce: [00:09:11] seriously busted and then they'd shoot anyway. [00:09:13][1.9]

Alec: [00:09:14] So anyway, let's not get into that. [00:09:16][2.0]

Bryce: [00:09:16] But yes, I got done through Amazon. [00:09:17][1.1]

Alec: [00:09:18] Yeah. So that's a key bucket. Another one which I think is underappreciated, but I think is the most scary is the taking down of critical infrastructure. And you know, that's everything from traffic lights to the electricity grid to dams to everything now is electrified and online and relies on online based control systems. So if things get hacked and foreign actors or other parties take control of infrastructure, they can cause serious damage. And I think the best example of that is when Russia invaded Georgia in 2007 and then when Russia invaded Crimea in 2016, they took down the Internet in Crimea in 2016, just took it down completely. But in 2007, they did a whole bunch of stuff at news agencies, all that stuff. So, like you can you can say some serious disruption. So that's a really clear example in the media. My favourite example of a cyber attack. Yes, I have a favourite example [00:10:13][55.4]

Alec: [00:10:14] of a tattoo. I have you heard of [00:10:17][2.5]

Alec: [00:10:17] the Stuxnet attack. So in the mid 2000s, Iran was allegedly producing, you [00:10:23][6.5]

Alec: [00:10:23] can say whatever you want to call it, by allegedly [00:10:25][2.0]

Alec: [00:10:26] Iran was allegedly producing nuclear material and allegedly, again, never been confirmed. Israel and the US worked together on this Stuxnet virus, got it into the Iranian nuclear facility. Not sure how. And then basically all the virus did was made the centrifuge. Nuclear centrifuges spin too fast. So they broke down and they set this cyber attack through the Stuxnet virus, set the Iranian nuclear programme back, you know, X number of years. And then it started a secret for a long time and then eventually came out. So, like key pieces of critical infrastructure are at risk. So that's the second one. And then a third category that people may be familiar with is that sort of extortion and ransom where people can take control of your systems or your computer or whatever, and then then use it or demand things to get it back so they want to cry. Ransomware attack in twenty seventeen. Remember that that like, crippled British health care system. Yeah. And they it was like we will unlock these this. If you give us X number of Bitcoin, so I guess that for me just sets the scene in terms of what are some of the types of cyber attacks that this industry is defending against and some of the classic examples. There was a quote from the former Cisco CEO [00:11:41][75.2]

Alec: [00:11:42] describing the big player, [00:11:43][0.8]

Alec: [00:11:43] the big player. Yeah. He said, there are two types of companies, those that have been hacked and those that don't know they've been hacked. It is just such a pervasive problem. [00:11:52][8.3]

Bryce: [00:11:52] Yeah, it's nuts. Yeah. And the thing is, some organisations are getting hacked and they don't have the expertise or frameworks to actually understand what the hell's going on sale. [00:12:00][8.0]

Alec: [00:12:01] So we've probably been hacked. [00:12:02][1.2]

Alec: [00:12:04] Sure. [00:12:04][0.0]

Bryce: [00:12:05] All our IP. So great context Ren. But I guess the big question is it's now becoming the hot topic and I'm sure covid has had implications on this. What's your research telling us from that point of view? [00:12:18][13.6]

Alec: [00:12:19] Well, I think there's some obvious changes. More and more businesses and governments are moving their operations online. So there's obviously just more data there. There's more things online which creates a risk. Yeah. The second and probably more important risk is as people move from working in offices to working from home, that creates more risk because times are just less secure. You know, the businesses NBN. Exactly. Yeah. Huawei router allegedly, allegedly. [00:12:49][30.0]

Alec: [00:12:50] Allegedly saying it is a podcast. Yes. [00:12:54][4.4]

Bryce: [00:12:55] Well, yeah, there's businesses that specialise in the protection of the hardware side of things, because at the end of the day, you could protect your infrastructure in terms of connexions. But if someone is able to get into your actual laptop or your phone. Gameover. [00:13:11][15.5]

Alec: [00:13:12] Yeah. So Covid obviously accelerated a lot of the trends that are really propping up this industry. The other thing that's accelerating the trend is governments are responding in a really strong way from a national security perspective. So to take an Australian example, in July this year, the Australian government reported a record one point thirty five billion investment in cyber security, mainly around like the Defence Signals Directorate and stuff like that, really beefing up their infrastructure. But that's also part of a bigger 15 billion dollar defence investment in cyber and information warfare capability. There's a lot of reasons that this is an accelerating industry and accelerating trend get on board. So if we move from the context to the actual investable industry. Yes. Want to tell us a little bit about that? [00:14:02][50.3]

Bryce: [00:14:02] So worldwide security spending is expected to grow two point four per cent to reach one hundred and twenty three point eight billion in 2020. So significant money starting to come in. And those numbers are coming from research firm Gartner. In the latest June forecast, pre coronavirus December forecast called for eight point seven per cent growth of the industry, with cloud security being one of the big contributors to that booming 33 per cent to five hundred and eighty five million. So, I mean, get on board the cloud cloud security. [00:14:37][34.9]

Alec: [00:14:38] This is where you make some joke about like cumulonimbus or something like that. [00:14:41][3.0]

Alec: [00:14:41] No, metal is not going to do that. [00:14:42][1.6]

Bryce: [00:14:43] So over in the states, the industry or the sector is obviously under the technology. And most of the companies that we talk about fall within software infrastructure. If you are looking to find a list of companies, that is a two trillion dollar market cap over in the states. So absolutely massive industry to be investing in. Yeah, it's [00:15:02][19.2]

Alec: [00:15:02] booming for me. I was trying to think about how to think about the industry. That's not a very good sentence. So that's not a good but but it's like there's there's so many different companies that do different parts of the cyber security job in the ecosystem. Yes. It's not like you sign up with, you know, Palo Alto networks and they'll do everything. Yeah, I mean, Palo Alto is a bigger company and other more, but there's so many different ways to think about it. So for me, I was just doing some Googling and reading some stuff. And there's two sort of frameworks or conceptualisations, I guess, to think about the industry. The first one, I guess, was a responsibility based framework. So there are companies that work on identifying threats. There are other companies that work on protecting networks and infrastructure from those threats. There are companies that can detect when an intrusion is happening. So identifying is like, you know, finding out new threats and stuff like that. Detecting is when they're actually attacking or whatever are responding is then how there's a whole bunch of companies that then work to remove threats or, you know, proactively respond to new threats. And then there's a whole bunch of companies that do things around data recovery and data protection and stuff like that. So that that was one framework that I saw that maybe helps people think about the different players in the sector. [00:16:22][79.2]

Bryce: [00:16:22] Again, we will have this on our website at some point. [00:16:24][2.2]

Alec: [00:16:25] There was a. Another one which was a little bit more complicated, but there was like a layer based framework, and so you can think about, you know, there's some layers, there's like a paper layer. So it's, you know, how do you stop people doing the wrong thing, you know, stopping phishing email like people clicking on phishing emails and stuff like that. There's a software application like fishing industry. [00:16:45][19.6]

Alec: [00:16:45] Yeah, yeah, yeah. [00:16:46][0.5]

Alec: [00:16:46] There we go. There's that Bryce Leskie sense of humour software application layer. So like, how do we protect software? How do you stop, you know, like zero day exploits which are like, you know, flaws in your software that can be immediately exploited. Operating system like a machine language layer, a whole bunch of different things, even things like a geographic layer, like how do you protect physical data centres and stuff from being hacked? [00:17:08][21.7]

Bryce: [00:17:08] Thinking about all of that, if you're a reasonably sized business, you're going to need to be protecting a lot of stuff, a lot of layers. [00:17:16][7.9]

Alec: [00:17:16] Yeah, this is going to be very expensive. It is. That's what you need to to get a lot of [00:17:21][4.6]

Bryce: [00:17:21] companies on board to protect yourself. Yeah. Some companies might not be able to afford to do this. Yes. How do you know? I mean, from a due diligence process, how do you know who's protected and who's not? [00:17:31][9.9]

Alec: [00:17:31] Well, part [00:17:32][0.4]

Alec: [00:17:32] of what the that government one point thirty five billion, the Australian Government's one point thirty five billion package was to create like a platform or a portal to share information for companies, governments, national security agencies, to all collaborate on information for that exact reason that smaller companies don't have the resources to understand everything that's going on themselves. So I think the government's pretty aware of that and is trying to use their cyber capabilities and their cyber expertise to then help businesses. [00:18:01][28.7]

Bryce: [00:18:02] You can see it becoming like a point of differentiation down the track, where companies will more and more say we're the most secure 100 percent. [00:18:09][7.5]

Alec: [00:18:09] We've got you covered. Yeah, yeah, yeah. What's that ad for? We've got you covered. RMI something. Yeah. [00:18:14][4.9]

Alec: [00:18:16] I mean companies already do that. Like that was PayPal's whole thing, like PayPal was the most secure way to pay on the. [00:18:22][6.4]

Alec: [00:18:22] But they do [00:18:23][0.3]

Bryce: [00:18:23] it at a like a you know, there's, you know, WhatsApp for example. Encryption. Yeah. I'm thinking iconic. For example they probably have or a larger organisation who take in many different points of data like Woolworths, for example, would have to be protecting way more than just your payments. Yeah, yeah, yeah. They're not coming out and saying, hey, we're the most secure retailer in Australia. [00:18:43][20.1]

Alec: [00:18:44] Yeah. From a business perspective, like if I was Woolworths, I wouldn't want to be talking about that because it creates a lot of risk to risks. [00:18:51][6.9]

Alec: [00:18:51] One, people want to the system put a target on your back and [00:18:55][3.7]

Alec: [00:18:56] it's like it would be so fleeting, like a new threat to merge new systems. [00:19:00][4.0]

Alec: [00:19:00] Get just keep saying it then. Yeah, yeah, yeah I guess. But yeah, I know what I'm saying. [00:19:04][4.4]

Alec: [00:19:05] I imagine Woolworths and Coles, like the companies that have big loyalty programmes, you know, flybys and Woolworths rewards and stuff like they would be secured to the [00:19:13][8.5]

Alec: [00:19:13] Oh yeah, yeah, yeah, yeah. You'd hope [00:19:15][1.4]

Alec: [00:19:15] so. In the ride up we'll include in those different frameworks that we spoke about, some examples of companies that sort of specialise on on each of those layers. But I think what we should do to not get too bogged down in conceptualising the industry is maybe move on to some specific companies. Yeah, sort of how you can invest in a for me, my biggest takeaway was this is an ETF industry. Yeah. [00:19:42][26.8]

Alec: [00:19:42] Big time. Yeah. Yeah. [00:19:43][1.1]

Alec: [00:19:44] So I think [00:19:45][1.1]

Bryce: [00:19:46] I mean, there's plenty of opportunities to invest directly. But you talk about circle of competence. I was about [00:19:51][4.9]

Alec: [00:19:51] to ask you, would you say cyber security in your circle of competence? [00:19:53][2.3]

Bryce: [00:19:53] No, I understand like what it means for a company if they're saying we do data protection, encryption or, you know, protection of hardware or whatever. But that's about as far as it goes, how I then differentiate who's going to win in the space. So what are the you know, [00:20:07][14.0]

Alec: [00:20:08] if I was going to say like, alright, I think like identity management for systems is super important and managing people who have administrative access to computer systems is going to be a key pivot point in the future of cybersecurity. I couldn't tell you if cyber software or OCTA is has a better, you know, management system. [00:20:28][20.0]

Alec: [00:20:28] I've actually got a bit [00:20:29][0.7]

Bryce: [00:20:29] of beef with these guys. Their names, [00:20:31][1.5]

Alec: [00:20:33] Z, [00:20:33][0.0]

Bryce: [00:20:33] Skylar's Splunk, Proofpoint Ping Orckit [00:20:36][3.0]

Alec: [00:20:37] close call this fourth and see that looks like guys like VMware. It's like come on in your identity. Hold on. It's silly, silly, silly. OK, so you sign that [00:20:52][15.3]

Alec: [00:20:53] one makes me. [00:20:53][0.5]

Bryce: [00:20:53] Have you seen the share price of DocuSign unbelievability killing it. [00:20:57][3.2]

Alec: [00:20:57] I can say that I'd never used it before covid and now I know the sign. [00:21:00][2.9]

Bryce: [00:21:00] I just kick myself off topic. But covid again, if this makes sense from market point of view to sit back and actually have a much broader think about what is going to happen. Like it, Zun, DocuSign, Eadweard, DocuSign. [00:21:15][14.8]

Alec: [00:21:15] We've been using it. Hate's Yeah we have SonicWALL our deal. Yeah. OK, yeah. Zoom, zoom, zoom, [00:21:22][7.0]

Alec: [00:21:23] zoom, zoom. [00:21:23][0.6]

Alec: [00:21:24] Just a classic again when I'm. [00:21:25][1.4]

Alec: [00:21:25] When the founder of this is completely off topic, but when the founder of Zoom left, he was one of those bigger companies. I think it was Cisco. I might be wrong. I may have been like IBM or something. When he resigned, 40 of the engineers that worked for him also resigned. Wow. Yeah. And that's that [00:21:42][16.2]

Alec: [00:21:42] that's something that is loyal. That's good management. Yeah. [00:21:45][2.6]

Bryce: [00:21:45] Again, another company, Molly Spoon killing. [00:21:47][1.8]

Alec: [00:21:48] It makes sense. Don't pay me. Didn't think he had. [00:21:51][3.7]

Bryce: [00:21:52] That doesn't matter. You pay stocks that go up killing it. It's like down anyway, back on to cyber security. [00:21:58][6.3]

Alec: [00:21:59] So I think for me this was an industry where ETFs for me personally make a lot of sense because it's outside my circle of competence. So I think if we start with the eighth conversation and then we move into some of the different players individually. So there's one Australian ETF hack hack that focuses specifically on cyber security. Yeah, and that's issued by beta shares. There are a number of others that are influenced by the sector or touched on the sector. So basically, any of your US tech or global tech focussed ETFs will have cyber security exposure. Things like and AQ will have companies that related to the cyber security space. But in terms of pure play, cyber security hack is the main one. You would also probably touch on cyber security if you looked at Symantec ETFs in the robotics or artificial intelligence and machine learning sectors. But globally, there's also a number. There's four in the US, there's a half in the US issued by a different ETF provider. But with the same ticker just on a different exchange, there's a Nasdaq one CAIB are there's cyber security and tech one, which is I hack I a K and then there's a global cyber security ETF on the Nasdaq with the ticker bug Babuji. And then there's a fourth one, the MSCI Cybersecurity. So those are the four listed in America that you can also access through the likes of stake or etat. Actually, there's plenty of brokers that you can access US ETFs these days, but obviously then it's in US days. So just be mindful of that one thing that I found particularly interesting. So the MSCI, which is like index creator, they have a MSCI. I say why I am I Cyber Security Index? A lot of acronyms that yes, they issued a fact sheet. The most recent fact sheet was from the thirty first of July. Twenty twenty biggest holding in that index, [00:23:53][114.2]

Alec: [00:23:54] zoom [00:23:54][0.0]

Alec: [00:23:55] zoom video communications. Six percent of the index. Yeah. [00:23:58][2.3]

Bryce: [00:23:58] Crazy. I think my comment to all of them that you mentioned Ren, it's very important that you go in and actually look at the holdings. Some are going to be more focussed on actual companies in cybersecurity. You mentioned earlier and there are others that have some of the larger tech stocks that can somehow be related to cyber security. So just make sure you're going in and looking at the top holdings of these ETFs to ensure that what you're buying into is actually, I guess, reflective of what's on the front cover. [00:24:25][27.1]

Alec: [00:24:26] So so to give another example, so that one, the biggest holdings are zone, there's a bunch of pure play cybersecurity companies, crowd strikes, Skylar, Gestae Holdings, OCTA, Checkpoint Software, Avast like companies that some of them I may have heard of, but none that I know that well. Then I open another factsheet. This one's from State Street and they've got a private fund alternative, but their biggest holdings like Apple, Microsoft, Amazon, Facebook, alphabet. So with these cyber ETFs, it does seem like there's a little bit of a discrepancy between the K holdings, just depending on what index they're tracking or what the constituent parts are. So for me, I guess the key takeaway is this is an industry where ETFs make a lot of sense because more than anything, I'm investing in the macro trend, the cyber security impetus that every government and every business is feeling at the moment. I'm less trying to pick an individual stock that will outperform the sector as a whole because it's outside of my circle of competence and I just don't have the specialised level of knowledge required. [00:25:27][61.7]

Bryce: [00:25:28] Absolutely. The only thing that I've realised Ren is whilst we do have an ETF here in Australia, it is pretty much reflective of the major ETFs over in America in terms of holdings, if you wanted a specific stock play for Australian cybersecurity companies, you're going to have to do some digging to find listed companies on the ASX that are Australian. So that's just a call out if you're looking for Australian market. [00:25:55][27.2]

Alec: [00:25:55] But my take on that is that there is no reason to be geographically bound here. Cyber security is an industry that is truly global and the idea of restricting yourself to one market seems arbitrary and unnecessary. I think the US obviously has the bulk of the listed cyber security stocks, the biggest in the world. But Israel also really punches above its weight in this sector. The UK has a number of cyber related stocks, but it's a truly global industry and. All of the ETFs reflect that, and I think there's a lesson in that, that, you know, it's not like retail where Woolworths and Coles pure play Australian retailers and it's not a truly globalised industry. Yeah. [00:26:37][41.1]

Bryce: [00:28:31] Nice Ren, so that covers off a little bit about the context, a bit about the industry itself and some of the key ways that you can invest through ETFs. So let's move on [00:28:42][10.8]

Alec: [00:28:43] to [00:28:43][0.0]

Alec: [00:28:44] specific companies, [00:28:44][0.5]

Bryce: [00:28:45] specific stocks. [00:28:45][0.6]

Alec: [00:28:46] So for me, the way I conceptualise this was cyber related companies and then cyber specific companies. So cyber related companies as a bunch of well-known companies in the world that have exposure to this megatrend, the big tech players, Microsoft, Amazon, alphabet, they you know, especially with their cloud businesses and they obviously do a lot in to secure their own networks and they're exposed to the cyber security sector. So that's that's one. The second is the military contractors. So cyber warfare is massive. The first strike in the next war is more likely than not going to be cyber. And there's a number of players in the sector that have big cyber security or cyber warfare arms, Baia Systems, Thales, Raytheon. There's a bunch that play in that sector. There's also infrastructure players, the likes of Cisco and IBM and stuff like that exposed to the sector. There's a few different buckets, but then you get into the specific cyber companies. You found three that are publicly listed in Australia. So maybe we just named we named check them here. But in terms of the details, let's save it for the sure written piece because otherwise we're just going to be shouting numbers down and [00:30:01][74.8]

Bryce: [00:30:01] I'm sure there are more. But this is just a couple that I came across in terms of listed Cipha Point, cept they specialise in data protection family zone. This is an interesting one, not necessarily cyber security, but they allow you to protect your kids through manipulation of devices and that sort of stuff. But I just thought, interesting play. [00:30:20][18.7]

Alec: [00:30:20] I'm actually installing that on Al Equity Mates servers to stop your, shall we say, troubling web [00:30:28][7.4]

Alec: [00:30:28] browsing habits, [00:30:28][0.5]

Bryce: [00:30:31] lies, and then send Natus Corp again. Interesting name. CNN is the ticker and they specialise in encryption technology. So three Aussie stocks. But as I said, if you're interested in finding more on this, you need to dig into software infrastructure, which falls on the technology sector to find out more. I think there were about 30 stocks that fell under that sector. Interestingly, you have Afterpay and Zipp in that sector as well. So I don't know if that double dipping across multiple sectors. I don't know if that's possible. Should know [00:31:02][31.8]

Alec: [00:31:03] that. [00:31:03][0.0]

Bryce: [00:31:04] But yeah, there's about 30 companies under that sector at the moment. [00:31:07][3.3]

Alec: [00:31:08] Yeah. And then in the US there's a bunch we named Tech, some of them before when we were making fun of their names. A few, like Palo Alto Networks, is a big one that you hear a lot about. Crowd Strike Holdings. They reported earnings yesterday. [00:31:20][12.8]

Bryce: [00:31:21] Yeah, very, very recently. [00:31:22][1.3]

Alec: [00:31:23] Overnight, very recently [00:31:24][0.8]

Alec: [00:31:24] when we're recording this and their stock price was up 14 percent. [00:31:27][2.7]

Bryce: [00:31:28] So they're everywhere at the moment. Whenever you look at some of the stuff that's coming out in this space, crowd strike is always one that is popping up, is the sort of hot stock at the moment, as is cyber arc software. But again, Crowd Strike Holdings, it sounds like a bowling alley, [00:31:42][13.8]

Alec: [00:31:43] don't you think? I'm going to I'm going to let you go. I'll just go with this. We're not going to be able to get [00:31:50][7.3]

Alec: [00:31:50] any cyber security contractors to protect our networks. We named a few before. So let's not let's not get too into that. The way I want to close this out, unless you've got any other companies you want to touch on now. [00:32:01][10.6]

Bryce: [00:32:01] I think from my point of view, as I said, the hot stocks at the moment from I guess, an interest point of view and what's online is cyber software crowd strike, Palo Alto, Z., Skyler. And also, guys, go and check out DocuSign. I'm just looking at the graph now. It's good. Is it? Yeah, yeah. It's up 300 percent since October. [00:32:18][17.1]

Alec: [00:32:19] Yeah. So anyway, [00:32:21][1.6]

Alec: [00:32:21] the way I want to close this out is maybe just touch on a few of the risks. So obviously there's a lot of reasons to like the sector, but that doesn't mean it's a slam dunk. It doesn't mean it's a sure thing. For me, the first risk is just a valuation risk. A lot of those stocks trade at a premium because of all the positive headwinds. So that's always something to think about. And I guess related to that, but somewhat separately is that there's a lot of competition in the space. And for me, I have no real ability to decide which stocks are going to win and which stocks are going to lose. Even if you're investing in an ETF, if an ETF is market cap weighted and some of the biggest stocks can't live up to their valuation and some of the smaller stocks take market share from the bigger ones in the ETF, then the stocks that are growing a smaller parts of the ETF. Yeah, so valuation risk and that competitive risk I think is a big one. But for me, I think there are also risks to the industry that need to be made aware. So obviously I is coming and that will significantly enhance cyber offensive capabilities. So if you think about cyber. It is defence and then hackers and state actors and all of that who are attacking systems as offence, a lot of artificial intelligence and machine learning will enable better cyber attacks, which then will require a response. And so what companies are going to be best placed to create new defensive software, new defensive infrastructure and stuff like that? So I think that's one related to that. Also quantum computing. So as quantum computing becomes more and more realistic, that creates, again, a risk of massively enhancing the ability of cyber offensive capabilities to overwhelm and just based cyber security companies and defensive systems. So I think it's an interesting industry. Obviously, whatever comes on the offensive side, whatever new methods of hacking, whatever new exploits have found, whatever new technology is utilised in this endeavour, there will be a defensive response from governments and from the private sector. So there will always be companies that are responding to these threats and winning in a financial sense on the back of it. But it's a sector that is massively changing all the time. New threats are constantly emerging, and it's one that, you know, it's a risk that you have to know, especially if you're going to be holding a specific company in this sector. I feel like this is one of the industries where you really need to know your stuff. [00:34:55][153.4]

Bryce: [00:34:55] Yeah, great. If you do, because you might be able to find some real winners. [00:34:58][3.1]

Alec: [00:34:59] I mean, if you're great, if you do, because you'll be able to find some real winners and you'll probably have a very high paying job in the cybersecurity sector. [00:35:05][6.7]

Bryce: [00:35:06] Sure, sure. Are you invested in any at Ren? [00:35:09][2.8]

Alec: [00:35:09] Yeah. Yeah, I'm in the Australian. One year in hack. Yeah. Yeah. [00:35:12][3.0]

Alec: [00:35:13] What a hack. [00:35:13][0.2]

Alec: [00:35:15] That's obviously nothing here is a recommendation, but for me personally, I've been in Hack for a while [00:35:20][5.4]

Bryce: [00:35:21] since we interviewed them back in 2010. [00:35:22][1.6]

Alec: [00:35:23] Yeah, actually I think so. Yeah. Yeah. [00:35:25][1.9]

Bryce: [00:35:25] I mean it made sense. Does it [00:35:27][1.8]

Alec: [00:35:28] make sense. It's done well over the years it [00:35:30][1.6]

Alec: [00:35:30] has done well. Oh yeah. Yeah, yeah. Well hold on. What about you. I'm actually not. Yeah. No. [00:35:36][5.9]

Alec: [00:35:36] Well because you didn't like the names of any of the companies [00:35:38][1.9]

Alec: [00:35:39] I went talking to you. [00:35:39][0.7]

Bryce: [00:35:40] No I'm not for no real reason other than I've focussed on other things I think. Yeah I'm just right. It's all it's on my list. Yeah. Certainly on my list. And I think this has kind of triggered my thinking that I probably should take some action on it. So we'll say nice. Well that's a that's a great wrap of the the industry Ren. And if anyone has any comments or like any further I guess, questions on that, then hit us up on our social's email, whatever. And to Ren point before, if you have any investing ideas or thesis that touch on cybersecurity, we would love to hear from you. Welcome to come on the show. Chat to us for ten, fifteen, twenty minutes, whatever you like. [00:36:20][39.3]

Alec: [00:36:20] Yeah. If you have that knowledge and you can tell us which of these companies with a stupid name it's going to win in this field. We want to hear it. [00:36:27][7.1]

Bryce: [00:36:27] We do want to put some in our satellite portfolio. So well, maybe it depends on the pitch, but at this stage it sounds like we don't know enough about the individual stocks to do so. So looking for someone to come and help us work through that. But other than that, Ren, we'll leave it there. [00:36:42][14.5]

Alec: [00:36:42] Anything else you want to cover? [00:36:43][0.8]

Alec: [00:36:43] Not just if you want more, go to our website or go to the show notes and there will be a written version of this. [00:36:49][5.3]

Alec: [00:36:49] We promised at some point, at some point, fast and loose Ren. [00:36:57][7.6]

Bryce: [00:36:57] We'll we'll we'll talk next week. [00:36:58][1.4]

Alec: [00:36:59] Sounds good. [00:36:59][0.3]

Speaker 4: [00:36:59] Thanks for listening to Equity Mates investing podcast production of Equity Mates Media. Please remember that everything you hear in Equity Mates investment podcast with general advice on link content has been prepared, not knowing your personal objectives, specific financial circumstances or goals. The host of Equity Mates Investment Podcast may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:36:59][0.0]


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