CIBR: The Growing Cybersecurity Industry Is Quite Attractive But Often Overpriced

I rate the First Trust Nasdaq CEA Cybersecurity ETF (NASDAQ:CIBR) a Hold. I believe that the cybersecurity industry is well-positioned for long-term growth for it could profit from developments in cloud computing and artificial intelligence. However, I believe that CIBR is currently overvalued, forcing me into a neutral position. It's currently quite expensive and I believe enterprises, particularly those that rely heavily on tech for operations, are yet to fully acknowledge the benefits of cybersecurity.

Nearly three years following the onset of the COVID-19 pandemic, workplace technology has seen momentous progressions, one of the most notable being the introduction of The Cloud. The Cloud is an increasingly prevalent term that depicts the internet as an intricate network, or "cloud" of servers, computers, and other IoT (internet of things) devices. The Cloud conveniently provides a variety of computing resources and applications such as data storage, software as a service (SAAS), and infrastructure as a service (IaaS).

The amount of remote work and business transactions done electronically have therefore increased. This remains a huge convenience for a lot of workers and executives, but also catalyzed the frequency of cyberattacks as hackers now have more potential targets.

Therefore, despite CIBR's price being quite high, I believe those that own CIBR could experience enhanced profits in the long term as society and the workforce digitizes.

Strategy

CIBR tracks the Nasdaq CTA Cybersecurity Index TR USD Index and uses a full replication technique. This ETF is composed of both value and growth stocks of varying market capitalization. CIBR was launched and is currently managed by First Trust Advisors L.P.

Holdings Analysis

CIBR invests primarily in technology companies, leaving only 7% to industrials and communication combined. Within technology, many companies held in CIBR specialize in cybersecurity, information technology (IT), software, and hardware. Given that technology is already a volatile industry, investors may want to take this possible concentration risk into extra consideration before making an investment decision. The top 10 holdings account for 49% of total holdings and the top 25 comprise 90% in this ETF of 40 holdings, making it decently top-heavy.

CIBR invests primarily in stocks within the United States, allocating all but 15% to United States companies. Holdings outside in the United States appear in India, Japan, and Europe. Investors could consider the influence of these nations somewhat irrelevant in the overall performance of this ETF.

Strengths

I believe CIBR is in a potentially profitable position right now as both the costs of reparations for a cyberattack and the number of hackers recently reached new highs and are forecasted to keep increasing.

Depicted below is the average cost of a data breach in the United States, which appears to have peaked last year.

Companies held in CIBR could effectively profit from this situation, as enterprises may be inclined to protect their funds by adopting cybersecurity solutions.

The blue line on the chart below depicts the trend in the number of data compromises dating back to 2005.

A cyberattack becoming more likely could compel corporations to purchase cybersecurity out of fear of being hacked. As Warren Buffett once said, "Only when the tide goes out do you discover who's been swimming naked." In this case, getting hacked without cybersecurity equates to being caught naked, which companies may not want to risk at a certain point.

Weaknesses

CIBR is currently quite overpriced, trading at roughly 26x earnings compared to roughly 20x in SPDR S&P 500 Trust ETF (SPY). This translates to a premium of roughly 30% compared to the broader market. This aspect may be particularly unattractive amid current economic uncertainty and elevated interest rates.

Many holdings in CIRB are not actually pure-cybersecurity stocks, meaning this ETF may not invest as much into cybersecurity as scripted. A decent portion of holdings are more indirectly involved in cybersecurity, such as IT security and hardware. This might lead one to prefer investing in individual cybersecurity stocks over investing in CIBR.

Opportunities

CIBR could potentially profit from the emergence of new artificial intelligence systems, which have been gaining popularity quickly. Similar to cloud computing, artificial intelligence is a system that people are frequently utilizing and becoming increasingly more reliant on. A renowned example that I have covered previously is OpenAI's ChatGPT. I covered this development in my previous piece on iShares Global Tech ETF (IXN).

Newly emerging artificial intelligence systems may require cybersecurity to protect databases with valuable algorithms as well as prevent denial-of-service (DoS) attacks.

Threats

Elevated interest rates may make services like cybersecurity more of a luxury and less of a priority. Cybersecurity systems are quite expensive and hedge the possibility of getting hacked. In this regard, some companies may resent buying an installment which could be of limited use assuming they're not the target of a hacker. Though I mentioned previously that companies becoming more loss averse could incline them to buy cybersecurity, it could also deter them from buying.

Conclusions

ETF Quality Opinion

CIBR could be an effective way for investors to gain exposure to the cybersecurity industry. ETFs like CIBR could become quite attractive in the long term as they could potentially profit from increased reliance on IoT technology for both everyday and professional activities. However, at the moment, CIBR is likely not the most cost-efficient method to benefit from these emerging trends.

ETF Investment Opinion

I rate CIBR a long term Hold. CIBR is currently quite expensive and therefore somewhat unfavorable during current periods of high inflation. The majority of primarily-digital enterprises may not fully acknowledge the importance of cybersecurity for another year or so, during which time interest rates could ease. At this same point, the number of hackers could also be a more prominent threat, possibly leading companies to purchase newly-affordable cybersecurity. Ultimately, investors may want to wait until CIBR is cheaper and the economy is in better health to consider making an investment.