Three Cybersecurity Names to Lock Down for the Long Term

In our increasingly interconnected digital world, cybersecurity is more essential than ever. The viruses that infected home computers 20 years ago were more annoyances than actual threats. These days, cyberattacks are much more malicious, infiltrating entire networks and causing massive disruptions to businesses, supply chains, and governmental entities while exposing the personal information of millions of individuals to the risk of theft and exploitation.

This unfortunate trend is projected to get much worse, driven by increasing digitization, geopolitical tensions, technological advances like artificial intelligence (AI), the security vulnerabilities associated with remote work, and the challenges of identifying and prosecuting cybercriminals. The global cost of cybercrime has surged more than tenfold in recent years, from $860 billion in 2018 to an estimated $9.22 trillion in 2024. Over the next four years, this figure is projected to climb another 50% to $13.82 trillion.

So is now a good time to invest in cybersecurity stocks? We think the answer is yes. These stocks have lagged in recent months as investor enthusiasm around AI has shifted the focus to AI-related opportunities. Longer term, we see a sizable growth opportunity, and the near-term weakness has created a window to invest at attractive prices.

According to research firm McKinsey, the corporate sector plans to spend $213 billion on cybersecurity in 2024. However, that is not nearly enough to defend against the more than $9 trillion in projected damages caused by cybercrime. McKinsey argues that the corporate sector should be spending $2 trillion annually to safeguard against cyberattacks.

In another important development, both the U.S. and EU recently adopted rules aimed at getting businesses to bolster their cyber defenses. 

The SEC’s rule, passed in July 2023, requires public companies to disclose material cybersecurity incidents and provide information on their cybersecurity risk management, strategy, and governance on an annual basis. The rule is geared at encouraging companies to take steps to improve their cybersecurity posture.

The EU’s NIS 2 cybersecurity directive, enacted in October 2024, imposes stringent requirements around risk management, transparency obligations, and business continuity planning in the event of a cyber breach. Non-compliant companies can face stiff fines.

Baron Capital research analysts have extensive industry expertise and have been following cybersecurity stocks closely for years, and we have investments in select public companies in the space. As the growing cost of cyberattacks and new regulatory requirements prompt more businesses to invest in protection, we think the sizable gap between actual and ideal spend represents an opportunity for cybersecurity businesses – and investors.

Three companies in cybersecurity that we believe have exceptional long-term potential

CrowdStrike is a leading cybersecurity vendor, with a market cap of $77 billion.

We believe CrowdStrike is well positioned to benefit from the rapidly growing market for cybersecurity solutions, given its excellent management team, strong brand, leading position, and attractive go-to-market business model.

Competitive Advantages

• A shift of IT infrastructure to the cloud is driving demand for cloud application protection, and cybersecurity vendor consolidation is favoring end-to-end platforms with comprehensive security portfolios over single-point solutions. CrowdStrike offers a cloud-based platform that meets these demands, unlike legacy device-specific tools.
• Different modules are available to protect enterprise endpoints and cloud workloads from many types of cyber threats and provide threat intelligence, cyber analytics, vulnerability management, and automated and people-based remediation.
• CrowdStrike has a highly efficient go-to-market motion because its single, integrated platform allows customers to try out offerings for free through an in-app trial.

SentinelOne, which specializes in endpoint protection, cloud security, and security data analytics, is one of the fastest growing public cybersecurity companies.

Between larger customer engagements and improving operating efficiencies, we believe SentinelOne can continue to& rapidly expand margins and begin generating positive free cash& flow in the next year.

Competitive Advantages

• The migration of IT infrastructure from on-premise locations coupled with   vendor consolidation is driving demand for end-to-end cloud application protection. SentinelOne’s AI enabled platform is a superior solution that provides both cloud-based cyber protection and a comprehensive platform unlike legacy endpoint vendors.
• The company is leveraging its single data store and AI capabilities to cross-sell more products into its existing customer base and increase average sale prices.

Varonis Systems helps organizations classify, locate, and protect sensitive data across on-premise and cloud environments. The company has carved out a niche in handling unstructured data security, distinguishing itself by focusing on internal threats and employee interaction with data.

Varonis has a sizable existing client base that it has been transitioning to a Subscription as a Service (SaaS) model.

Competitive Advantages

• Varonis has sticky, embedded relationships with a large client base. Its solutions are used across a range of industries, including financial services, healthcare, education, government, and media.
• Demand for the SaaS model has been higher than expected. SaaS customers are landing with more licenses, paying 30% more per license, and signing deals faster.
• Varonis is investing in AI and machine learning to enhance the automation and effectiveness of its solutions. This strategic focus positions it to manage the evolving demands of data security.

Baron Capital can provide exposure to the featured stocks through an investment in our Funds as follows: CrowdStrike Holdings, Inc. – Baron Fifth Avenue Growth Fund - 1.6%, Baron Global Advantage Fund – 1.4%, Baron Opportunity Fund – 1.0%, Baron Technology Fund – 1.5%; Varonis Systems, Inc. – Baron Discovery Fund – 2.3%; SentinelOne, Inc. – Baron Discovery Fund – 2.5% (as of September 30, 2024)

Baron Capital is a premier asset management firm focused exclusively on delivering growth equity investment solutions to institutions, financial advisors, and individual investors. Since its founding in 1982, Baron Capital has employed the same approach across all strategies: investing for the long term in secular growth businesses with durable competitive advantages, run by great management teams. With $43.4 billion in assets under management across 19 strategies as of September 30, 2024, Baron Capital prides itself on delivering the best solutions and outcomes for clients globally.