With cyber security and ransomware again in the media recently1, we have seen an increased investor focus in this space. Over the years, cybercrime has developed in sophistication and scale to cause major economic ramifications for those affected. The risks of your social media accounts being hacked are dwarfed by the risk to other sectors like financial services, healthcare, manufacturing, government and transportation - with many countries and companies alike being labelled as “sitting ducks” for attacks.
ETFS Morningstar Global Technology ETF (ASX Code: TECH) provides exposure to quality global tech companies and captures the growing trends across the tech sector. TECH, therefore, enables investors to access individual themes, such as cyber security, through a broader sector ETF, with companies vetted for quality and value through Morningstar’s Moat methodology and price to fair value screen.
Renting out IT capacity in the cloud rather than building it yourself - is arguably the biggest tech trend of this decade.
Software as a Service
This service continues to grow and be a bigger piece of the pie as companies move to the cloud model and a subscription model of accessing the latest and greatest and secure software at all times.
5G and the companies that enable 5G technology, the semiconductors and required equipment are also favourable trends in technology.
The Internet of Things
The internet of things is something we continue to hear more about - making devices smarter, with more sensors, more processors, and greater connectivity.
Big data is an ongoing trend - capturing and analysing data and storing it efficiently.
Cyber security continues to be a focus, accelerated by the global move to remote working and the need to access networks and software from different devices and in different ways.
Trend in Focus: Cyber Security
Looking further into the theme of Cyber Security within our diversified technology fund; 4 companies, with a weight of 12.1% within TECH’s portfolio have direct exposure to the theme. Those companies are generating revenue through the defense of computers, servers, mobile devices, electronic systems, networks and data from malicious attacks similar to those we have seen recently. Palo Alto Networks, F5 networks, Okta inc and VMware inc, while perhaps not common vocabulary amongst investors, are at the forefront of this theme and have all passed Morningstar’s stringent Moat methodology and price to fair value screens to appear in the portfolio.
Palo Alto Networks (4.6% weighting)
Paolo Alto Networks is a US-based cybersecurity company focusing on firewalls and cloud base security offerings. The company serves over 70,000 organizations in over 150 countries, including 85 of the Fortune 100. With clients across Government, Financial Services, Healthcare, Education, Oil and Gas, Retail and Utilities, it’s expected in the increased threat environment that Palo Alto is well-positioned for outperformance. Morningstar rates Palo Alto with a Narrow Moat rating and a price to fair value ratio of 0.88, indicating that the company has 10 years of competitive advantage and is considered undervalued.
F5 Networks (3.7% weighting)
F5 Networks focuses on network security, access authorization and fraud prevention. Going beyond traditional approaches to security, F5 Networks uses behavioral analytics, automated learning, dynamic profiling and risk based polices for additional security protection. 48 out of the Fortune 50 companies are F5 customers. Operating across 43 countries F5 networks is well positioned for the surging demand for network security across application networks. The company is currently rated by Morningstar to have a Narrow Moat and a price to fair value ratio of 1.02 indicating that Morningstar perceive this company to be and valued fairly with 10 years of competitive advantage against its peers.
Okta inc (2.2% weighting)
More than 10,650 Global brands trust Okta to secure their digital interactions with employees and customers via Okta’s user authentication applications and identity controls. Customers include FedEx, Adobe, Renault and Zurich. With a workforce of over 3,500 spanning across the globe, Okta expects US$4bn in revenue which includes 35% annual sales growth rate year on year. Okta inc is considered to be fairly priced by Morningstar with a price to fair value ratio of 0.98 and a Narrow Moat rating indicating competitive advantage over the next 10 years.
VMware inc (2.0% weighting)
Through a range of acquisitions from 2011 to 2020, VMware has become a leader in the cyber security space including the security of mobile devices in enterprises, troubleshoot app security, employee device security, cloud security, breach detection security and malicious attack security. VMware’s customers include car manufacturers such as Mercedes-Benz, a number of banks and financial services companies, including our own ASX, Technology companies such as Netflix and universities and municipalities such as the city of Rome. VMware is considered by Morningstar to be undervalued with a price to fair value ratio of 0.76 and a Narrow Moat rating.
Source: Bloomberg as of 30 June 2021. Past performance is not a guarantee of future performance.