Cyber-crime-fighters – capes not required!

Jon: Hello and welcome to Silicon Valley Bite Size where we present regular updates on the tech sector from Allianz Technology Trust. I'm John Cronin, standing in again for regular presenter Cherry Reynard. And for this episode of Byte Size, I'm joined by Mike Seidenberg, fund manager of the Trust. Now in our previous podcast, Mike and I discussed the cybercrime and cybersecurity challenges facing the technology sector and wider global businesses. We looked at how business and governments are rising to that challenge in the face of increasing cyber attacks. Now, if you haven’t listened to the show already make sure you check it out. You can go to Silicon Valley Bitesize on any of your favourite podcast apps. But it’s a big topic and we wanted to delve deeper so for this edition of Silicon Valley Bitesize I want to get inside the companies that focus on cyber security. Mike, clearly, they see themselves as part of the solution, so what are the companies and what do they offer?

Mike: Yeah, I think the leading companies, for the most part, offer a multitude of solutions. And that really speaks to two things. A, you know, this is a constrained resource on the operator side. So, the demand for cybersecurity professionals outstrips the supply by a large amount. In fact, I think the last report I looked at, there were 2 million open requisitions related to cybersecurity. I think that was a U.S. only number.

Jon: So this is a good time to be a cybersecurity expert.

Mike: This is a great time to be a cybersecurity expert. I mean, this is probably the heyday. So, you have a scenario where you have a finite set of resources that need to run these systems, right? And you have this kind of the pain point being this narrative of false positives, which happen a lot, right? So you're spending resources against things you think are the problem, but it really isn't the problem. And therefore, if you think about the companies, are you going to do well? There are companies that have a multitude of solutions, right? They provide more than one just aspect of that layered approach.

I think about, and in no particular order here, I think about companies like a Palo Alto Networks, which has just a really robust suite of solutions that are very well integrated and allow the companies to get some operational efficiencies as they go across the various problem areas in cybersecurity. You know, they're a company that comes to mind. I think, in terms of a company like a CrowdStrike, which is really using not only, kind of next generation endpoint, but also doing a lot of other data collection to take it back and to create solutions around kind of mitigating cyber risks.

I think that we all the investors that would really like to find a company that's more kind of what I call cybersecurity operations focus. There really isn't a great solution for that today. I think that interestingly enough, as AI is further implemented across the cybersecurity universe, you'll see more operational efficiencies because I think that's a good example of using artificial intelligence and the beneficiary of lots of data in order to kind of mitigate some of the challenges from an operational perspective.

Those are two that come to mind. I mean, there's lots of different companies. But I think the important thing here is the understanding that what we hear consistently from companies as we go about our due diligence, which includes lots of listening to the companies and going out and talking to system integrators and chief security officers and whatnot, is really wanting to do more with less vendors primarily just to get that operational efficiency.

Jon: You mentioned AI there. How much of a game changer is artificial intelligence in the approach that companies can take to combatting cybercrime?

Mike: I mean, I think the real answer today is it's TBD, right? Because I don't really I don't think anyone really knows.

Jon: We're still working it out.

Mike: Yeah. Having said that, it should be a big beneficiary if you just think about the notion of collecting lots of data from different devices across whether that's an endpoint, whether that's an Internet of things world, etc., etc., and bringing it back and using the sophisticated algorithms and improve the outcomes, it should be a big beneficiary.

I would also tell investors in the space, a lot of this is has already started to happen and is happening obviously with the advent or with the just the heightened awareness around artificial intelligence, it just happens to be more top of mind. But yeah, I think it really it should help solve some of the more difficult problems over time.

Jon: And we've been thinking specifically about companies that focus on cyber security, but are there others involved in the supply chain?

Mike: Absolutely. And that's more of a new thing. So if I think about whether it's integrating security aspects to things like communications equipment, right? So some of the companies that traditionally have been pure play communications equipment providers are now integrating security aspects either to have kind of a rudimentary solution on their particular piece of equipment, or, and more likely, to feed that endpoint, that information coming off that box, back to one of the cybersecurity companies.

And I think that's a great example of just how the ecosystem works together. You're also seeing in some technologies like storage, you're seeing a security aspect being integrated into a version of DRAM storage.

Jon: Now, Mike, finally, I want you to put your fund manager hat on for this and take a look at the investment opportunity. The opportunity in cybersecurity has been well flagged, but how is the market growing and innovating in this space?

Mike: It's one of the more innovative sectors I look at from a growth perspective. I think that, and I already threw out the comment about the 12.6% per annum growth. You know, by definition that makes you secular, right? If we're talking about a number out to 2030 and that type of growth rate that to me speaks to the secular nature of cybersecurity.

You know, like most things in technology, it'll ebb and flow, right? There are going to be years where it grows much higher in years, where it grows, grows lower. I think post the pandemic where we saw valuations stretched, we've seen those valuations come in and where I look at the cybersecurity as a subsector today, it appears to be a healthy opportunity from a risk reward perspective, so, I mean, I'm excited about the long term growth aspects of the sector. It's something that we as a team spend a lot of time on. We have some dedicated resources on the team that really focus almost exclusively on it. So I think it's one of, if I use a real estate analogy, one of the better neighbourhoods in technology spending looking forward.

Jon: And I know you'll be careful with this question, but how do you make sure you don't pay too much?

Mike: Sure. Well, I mean, like everything we do in the trust, it's really a matter of risk and reward, right? We look at the opportunity. We look at what we think the companies are going to do from a model perspective. And then we look at what we think is fair valuation longer term. And then from that we can have a sense of what is our potential upside and what's our potential downside, with the caveat we have the right to change our minds throughout the process.

But we don't approach this sector any differently than we do other sectors from our process, which really is to create that mosaic to overlay what type of companies are in that particular universe, and then to think about what exactly are we playing for? What is the potential outcome on the positive side and what's it on the negative side?

Jon: And Mike, lastly, how do you make sure that you've got a diversity of opportunities when it comes to this space?

Mike: Yeah, it's a great question. Luckily, there are a lot of different companies and as I alluded to earlier, there are lots of different companies in cybersecurity, and it's much more of a layered approach today from a framework perspective. So we make sure that we're that we're focused on the layers of security that we think have the both best growth characteristics.

Unfortunately, as I sit here today in London, I would normally be at the RSA, which is the large cybersecurity tradeshow that happens kind of once a year. So luckily, I have a couple of my teammates over there are doing meetings.  But I think it's really important from an obsolescence perspective, that when you're investing in cybersecurity, you really understand  how relevant is the company? Because this is a subsector where I think companies become obsolete quickest due to the changing nature, which isn't just the company perspective, but it's also, remember, the adversary are constantly changing vectors from an attack perspective, right? So a method that may have worked today may not work two years from now because that vector of attack is no longer prevalent.

Jon: So companies, as you're indicating there, need to keep their fingers on the pulse.

Mike: 100%.

Jon: from an investment perspective, I guess that's what you need to do as well, keeping a close eye?

Mike: So yeah, it's really having a process. It's really understanding, what is really happening at the end markets, and then obviously translating that information back to making the best investment decisions for our customers.

Jon: Well, Mike, it's been a fascinating conversation on a really important topic, but sadly, we're out of time.

Mike: Well it's great to be here in person and I appreciate your time.

Jon: Well, thank you very much indeed, Mike. And if you've got any questions on the trust, please do go to the website. That's allianztechnologytrust.com, or contact one of the sales team. And of course, my thanks to Mike for his insights and his wisdom on the subject. And thank you for listening – from all of us, it's goodbye.