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Security Stocks Eye Best Week in Months as List of Hacks Grows

·3 min read

(Bloomberg) -- Shares of cybersecurity companies have been on a tear of late, as a rash of high-profile hacks prompt an aggressive response from the U.S. government and may signal strong demand for their services over the long term.

Attacks have recently come with alarming regularity. McDonald’s Corp. on Friday confirmed a breach of South Korean and Taiwan data, a day after hackers stole source code and related internal tools from Electronic Arts Inc. Earlier this week, JBS USA said it had paid a ransom to criminals responsible for a cyberattack in May that disrupted meat processing across North America and Australia.

This spate of breaches follow the high-profile attack on Colonial Pipeline Co. and a ransomware attack on CNA Financial Corp. last month, as well as a breach from December involving SolarWinds. These attacks have provided a tailwind for stocks, lifting the likes of Cloudflare Inc. and CrowdStrike Holdings Inc. to multi-month highs.

“This is one of the only industries where massive failures act as massive catalysts, as hacks reinforce the need for security services,” said Ryan Issakainen, senior vice president at First Trust Portfolios. “The budgets for cybersecurity spending are very likely to grow from here, and because you can’t just make a one-time investment, that growth is likely to be very durable and support companies who offer different services across the space,” he said in a phone interview.

The First Trust Nasdaq Cybersecurity ETF is headed for its biggest weekly gain in three months, up more than 4%. Other exchange-traded funds that track the sector, including the ETFMG Prime Cyber Security ETF and the Global X Cybersecurity ETF, are also poised for their best weeks since March.

Specific stocks like Cloudflare, CrowdStrike, FireEye Inc., and Zscaler Inc. are all up more than 10% this week. Bloomberg Intelligence named CrowdStrike as one that could see faster market-share gains “as threats from ransomware attacks push companies to replace legacy antivirus software.” Last week, the cyber security firm reported first-quarter results that analysts said were impressive.

According to CIBC Equity Research, cybersecurity funding hit a record high last year with investors pouring $7.8 billion in funds into cybersecurity across 665 venture capital funding deals, a trend that has continued thus far this year. The firm added that while there were a record six new cybersecurity unicorns minted in 2020 -- a reference to private companies valued at $1 billion or more -- that growth has accelerated in 2021, with nine cybersecurity unicorns emerging as of April, it said without specifying any companies.

The recent cyber attacks have made security a priority for the U.S. In May, President Joe Biden signed an executive order intended to strengthen cybersecurity, and his infrastructure proposal includes billions of dollars dedicated to improving defenses. The White House’s fiscal 2022 budget recommends funds to establish a new cybersecurity office.

Daniel Ives, an analyst at Wedbush, wrote that the executive order could mark an inflection point for the industry, and that federal spending on cybersecurity should “ramp significantly” up amid the growing threats, and additional demand drivers keep him positive on the overall sector.

“There is a $200 billion dollar growth opportunity in cloud security alone ‘up for grabs’ over the next few years,” he wrote in a June 7 report.

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