By Nicholas A. Vardy, CFA
The "Internet of Everything" is everywhere as devices of all shapes and sizes — from cellphones to Fitbits — get connected to the Internet. By 2020, Gartner estimates that there will be over 26 billion Internet-connected devices — 250 million of them automobiles. But this explosion in hyper-connectedness has introduced the world to a new and ominous concept: "cybercrime."
As the world becomes more interconnected through ever-expanding computerized networks, the frequency and scale of cybercrimes are likely to increase. That's why "cybersecurity" offers both traders and investors one of the most exciting investment opportunities in an otherwise flat-lining U.S. stock market.
Cybercrime is suddenly everywhere
Cybercrime has become a staple of the evening news.
In October of 2014, the breaches of the databases of The Home Depot /zigman2/quotes/208081807/composite HD +0.39% , JPMorgan Chase /zigman2/quotes/205971034/composite JPM -1.69% and Target /zigman2/quotes/207799045/composite TGT -1.41% compromised the security of 56 million credit cards, 76 million households, seven million small businesses and 110 million accounts.
Last month, the IRS announced that the identities of 2.7 million taxpayers were hacked last year. Last week, the government revealed that hackers stole personnel data and Social Security numbers for every federal staffer, past and present.
And cyber attacks are about more than just losing money. Attacks can potentially shut down or manipulate a country's energy infrastructure, weapons-defense systems, medical devices and transportation systems.
Russia launched the first cyber war against tiny Estonia in 2007. The president of Stanford told me two years ago that the Silicon Valley-based university was being attacked dozens of times a day, with most of the attacks coming from China.
And as mobile payment technologies like Apple /zigman2/quotes/202934861/composite AAPL -0.54% Pay and Google /zigman2/quotes/205453964/composite GOOG -0.75% Wallet take off, mobile devices will become more prominent victims of cyberattacks.
The eye-popping costs of cybercrime
The cost of cybercrime has hit its victims hard.
Home Depot estimated that the costs of its breach last year could top $62 million. Target estimates that its breach-related expenses hit an eye-popping $146 million. That's a lot of money. No wonder an estimated 60% of all companies experiencing a cybersecurity breach go out of business within six months of suffering an attack.
Overall, cybercrime costs the globe over $400 billion per year. That's more than the annual gross domestic product (GDP) of the Philippines, a country of 100 million people.
Defense against cyberattacks is becoming a very big business. Gartner estimates cybersecurity spending topped $71 billion last year. FBR Capital Markets predicts a global 20% increase in spending in 2015. This year's spending, in turn, could double to more than $155 billion by 2019.
Of course, picking the long-term winners within the dynamic and ever-changing cybersecurity sector is a challenge. That said, savvy investors know that the pattern for making money in any new sector is similar, whether it's automobiles in the early 1900s or the Internet in 1999.
Stage one involves a general run-up in the sector across a wide range of players.