With technology playing an ever-increasing role in the way we live our lives, protecting that bond is becoming even more important. Recent cyber attacks on the IMF and EMC's (NYSE:EMC) RSA security unit highlight the potential dangers of our reliance on networks. As our data moves to the cloud and our electric grid becomes smart, securing all the networks of the world will be a major task. Analysts estimate that billions must be spent, as the sophistication of the threats keeps evolving. For investors, companies involved in protecting that critical data could be one of the best long-term tech plays.
TUTORIAL: Five Minute Investing
Growing Number of Data Breaches
The modern world's reliance on computer networks grows more interconnected every day. From smartphone adoption and email to digital banking and credit cards, it seems that we use the web for more things than ever before. Perhaps, even more important, is the dependency of the Pentagon, municipalities, global exchanges and electrical grids on computer networks. This reliance underscores a disturbing trend: An exponential increase in data breaches. Industry experts estimate that in 2007 there were nearly 35 million data records breached. As of 2010, data breaches have soared to 285 million. The Department of Defense has reported that there are over 100 foreign intelligence organizations trying to break into U.S. networks. Google's (NASDAQ:GOOG) recent run-ins with Chinese hackers are just one example of the growing concern. These attacks can wreak much havoc. In 2000, a disgruntled employee created a computerized worm at a water-treatment plant in Australia. This virus released more than 200,000 gallons of sewage into parks, rivers and the grounds of a Hyatt hotel.
This trend of increased cyber attacks is also having an effect on IT spending. According to the White House, the budget for IT security spending in fiscal 2009 was around $7.3 billion. This was a 9.8% increase over fiscal year 2008. Utility companies around the world will spend $21 billion by 2015 to improve cyber security for the world's electrical smart grid. Overall, analysts estimate that spending on cyber security will grow 8.1% annually through 2015. Despite the calls for paring down defense spending in Washington, cyber security will remain one of the few growth areas in the defense budget for the near term. Spending by public corporations is also set to grow as cloud computing, mobile commerce and remote access become larger.
A Protection Portfolio
With the cyber threats continuing to mount and the reliance on computer networks growing, adding an IT security component to a portfolio makes sense. PowerShares Aerospace & Defense (NYSE:PPA) follows some of the largest defense contractors and could be used as proxy for the sector. However, as General Dynamics' (NYSE:GD) recent decision to lay off 5% of its 10,000 secure information systems workforce shows, not all defense contractors are taking the sector as serious. In addition, there are plenty of tech companies poised to take up the fight. Here are a few picks.
Fortinet (NASDAQ:FTNT) provides a system of unified threat management and all-around protection. By using Fortinet's products, customers save money and get an all-in-one protection, rather than piecemealing several systems. The company has recently partnered with Indian tech firm Sify (NASDAQ:SIFY) to roll out an on-demand security solution to their cloud computing customers and its Clean Connect service. Similarly, both Sourcefire (NASDAQ:FIRE) and Websense (NASDAQ:WBSN) provide cloud computing security options.
NASA has recently partnered with SAIC (NYSE:SAI) to upgrade the space agency's information systems. The contract was valued at $1.3 billion. A key component of the project will include upgrading IT security for those systems. The company just reported a 12% increase in first-quarter operating income versus the same quarter in 2010. Most of the gain has been due to new cyber security contracts.
Already a major player in the areas of building automation and energy efficiency, Honeywell International (NYSE:HON) has been moving into the sectors of smart grid security. This past October, it won a $2.2 million grant to research and develop systems architecture that limits operator's access to the appropriate levels for job function. Honeywell is a prime spot to present integration of its cyber security products with its grid offers.
As technology and the modern world continue to rely on computer networks to function, protecting those networks will be paramount issue. Cyber security stocks such as Symantec (NASDAQ:SYMC) will continue to see their bottom lines grow, as threats and spending continue to rise. For investors, investing in these companies can do a lot more than just protect their data. (For related reading, also take a look at Tips For Keeping Your Financial Data Safe Online.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!