The humiliating hack of Sony brought a close to a year in which the cybersecurity news stream was relentless.
If the Sony (SNE) hack was indeed perpetrated by the Democratic Republic of North Korea (DPRK), as the Obama administration alleges, that would represent a significant and dangerous escalation. The arrival of state and quasi-state actors raises threats to a new level. As we commented in our last piece on cybersecurity several months ago, the approach taken by traditional consumer-level antivirus -- reactive rather than proactive, with detection systems isolated within particular domains of risk -- is increasingly seen as fundamentally inadequate. What will replace it?
We believe that next generation cybersecurity will rely fundamentally on big data analytics. They key is the capacity for a security regime to gather unstructured data from across all parts of a network, and use those data to identify vulnerabilities and anticipate attacks before they occur. In addition, such data streams can help identify ongoing intrusions that have already occurred and gone undetected, a reality that administrators are beginning to learn is far more common than previously thought.
Big data analytics will allow a synoptic view of data points from across a network to be developed and interpreted much faster than has been possible until now.
Our contacts in the industry have pointed out that the most critical cybersecurity work is done within large firms -- in short, off-the-shelf solutions provided by dedicated cybersecurity companies are, to some extent, a stopgap measure, while in-house tailored solutions are preferable. This makes the space difficult for investors to approach as a theme, which is frustrating, because the theme is an attractive one. The new HACK ETF (HACK) provides exposure to a wide variety of software, hardware, cloud, and network companies in the space.
However, these are volatile stocks, and this is one area where investors may be better served doing diligent homework and picking individual companies. If one were to buy HACK, we would suggest waiting for a substantial decline from its current price before buying. We will focus on companies that straddle the big data and cybersecurity universes, particularly those with unique strengths and solutions. Investors will need patience and tolerance of volatility to profit in this environment.
Investment implications: The crescendo of cybersecurity news suggests that 2015 may be a year where cybersecurity draws a lot of attention and a lot of investment dollars. We will make specific stock recommendations throughout 2015. As we continue our research in this area, we are emphasizing diligent research on individual companies, concentrating on those which employ proprietary big data analytics in the deployment of security solutions.
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