First Trust Cybersecurity ETF: Further Growth Prospects With ChatGPT-Style AI (NASDAQ:CIBR)

Every day we hear about new opportunities available for generative AI tools like ChatGPT. Developed by OpenAI, its adoption is currently driven by Microsoft (MSFT) and already has 100 million users. I went crazy in February to do everything from report writing to computer code. Despite the regulatory warnings, we don’t hear much about cybersecurity damage.

As we will see later, these risks are real and the purpose of this paper is to promote the First Trust NASDAQ Cybersecurity ETF (NASDAQ: CIBR) should benefit from new market opportunities. 21 of his 35 holdings are pictured below.

For this purpose, I primarily use reports from two holdings, Gen Digital (GEN).) and Cisco (NASDAQ:CSCOMore), but for now it’s important to use the analogy of a personal computer with a GUI or graphical user interface to clarify the dangers.

Using GUI analogies to highlight danger

Before the GIU, computers were blank terminals with only an MSDOS prompt, and commands could usually only be entered by professionals with specific training. The excellent Windows interface allows you to launch applications with just a click of the mouse. Similarly, ChatGPT provides an easy-to-use interface that allows you to query the system for everything using the language you use every day without having to learn complex AI code.

So the possibilities are endless, both good and bad.

This simple operation allows cybercriminals to use ChatGPT to improve their phishing skills and create sophisticated threats, according to the Pulse report by Norton’s (now Gen Digital) global research team. It extracts (or hoists) sensitive data such as banking details from unsuspecting users, but in the worst case, hackers can create “deep fake chatbots”. They can impersonate (or pretend to be) the real thing (ChatGPT) and once the application is launched, they can extort data, compromise IT systems, demand ransoms to get back online, and commit fraud. can act.

According to Cisco, ChatGPT-style AI will make it harder for security teams to detect phishing attempts because it gives hackers more customization options. If you send emails to people on , hackers can customize them into more targeted attacks. people who take you by surprise.

Today, about 80% of unauthorized computer access already results from phishing, so imagine the nightmare scenarios IT security managers are likely to face as more users are lured to hackers’ tricks. can.

So given the hype aspect that allows hackers to improve their technology and people are drawn to all words including Chat and GPT, new AI techniques bring more vulnerabilities, but cybersecurity companies does not mean that we should develop defense mechanisms. Scratch to address these.

AI-based protection

Thus, to give hackers a taste of their own medicine, CIBR’s top holding, Fortinet (NASDAQ:FTNT), has announced that from 2022 onwards, it will seek to address the vast amount of data generated by routers and firewalls. are already using AI to Given the sophistication and velocity of today’s cyber threats, traditional IT was unable to meet security mandates. Therefore, only AI-driven tools enable the company to provide advanced monitoring and threat detection and mitigate zero-day attacks. These occur when flaws are exploited before IT security professionals can address them.

Taking a closer look, cybersecurity firms defend client IT systems with decoys in the form of “honeypots” that lure cybercriminals, allowing engineers to study attack patterns while keeping real data safe. We can make it possible. So, according to Nvidia’s (NASDAQ:NVDA) Chief Security Officer, such use of AI not only keeps attackers away from their actual targets, it also wastes their time.

Furthermore, it impacted the very operation of such critical services, as seen in the ransomware attack that compromised the IT systems of the Dallas Police Department. As a result, the number of digital interactions via laptops and mobile phones has increased significantly, increasing opportunities for criminals to fall prey.

As for the financial impact of power outages, McKinsey reports that losses are projected to reach $10.5 trillion annually by 2025, a 300% increase from the 2015 figure. That report, released in October 2022, does not consider the additional threats unleashed by ChatGPT. Therefore, more recent estimates put the cybersecurity market at $172 billion in his 2023, after a compound annual growth rate of 13.8%, and finally in 2030, he will reach $172 billion. estimated to reach $425 billion.

A growth rate of 13.8% now means more sales will be generated by holding CIBR, which is a plus in a fairly bleak corporate environment made up of local banks facing liquidity problems. bring.

Evaluation of CIBR

For investors, more sales bring CIBR a better valuation. That is a 3.37x current price-to-sales metric that hasn’t yet factored in additional revenue. Adjusting accordingly gives a 3.84x P/S (3.37x 1.138) shown in the table below. This translates into a target of $44.37 based on the current stock price of $38.99.

Still, in these opportunities, you have to be realistic. Because, despite being in the cybersecurity space, some of CIBR’s holdings need to invest in generative AI to advance their product and service offerings. This will require hiring more people in areas where expertise is scarce and security analysts form some of his highest paid IT positions. To this end, he relies heavily on how he leverages AI in his own business functions, including using advanced IT and ML (machine learning) to increase the productivity of his own workforce. increase.

Now, according to IBM’s CEO, 30% of non-customer-facing back-office workers could be replaced by AI and more automation in the next few years. Thinking aloud, an example that can be applied to cybersecurity is, first, increasing process automation to reduce costs while also making processes more efficient. Second, it can make your network more resilient to hacks. Third, as we just discussed, the security team uses innovative techniques to present fake data as her real IT assets to proactively threats such as attracting the attention of malicious individuals. can be detected.

Therefore, by optimizing how human resources are used, cybersecurity companies can also improve profitability. This is in addition to what you can generate through increasing sales levels.

Be realistic and compare with HACK

Realistically speaking, though, knowing exactly which particular companies will benefit more than others is only the early days of generative AI. Investing through an ETF like CIBR is exactly here, with benefits such as providing exposure to the entire cybersecurity ecosystem, from manufacturers of security devices such as firewalls to antivirus software providers.

Looking across the ETF space, there is also the ETFMG Prime Cyber ​​Security ETF (HACK), which has more holdings or 58 in its portfolio. The result is less concentration risk and slightly lower monthly or yearly volatility. But it is his CIBR that has outperformed by more than 20% over the past three years.

In this regard, we also like our exposure to Broadcom (NASDAQ:AVGO), the semiconductor business of First Trust ETF, which acquired Symantec a few years ago. We also have service provider Infosys (INFY), which is investing in its global security operations center with AI and ML-based tools. These can monitor networks on his 24/7 basis and are likely to be more sought after, especially by smaller businesses that cannot afford to hire their own team.

So, given the emphasis on strong names across the cybersecurity space, we can see CIBR outperforming with an expense ratio of 0.6%. He has over $4 billion in assets under management and a growing daily trading volume.

draw conclusions with caution

ETFs that have taken a more cautious stance, including high-growth technology names, are shown in red in the table above, largely due to the Federal Reserve’s aggressive rate hikes as of last March. The nearly 3% rise enjoyed by the CIBR on Friday therefore appears to have been driven by the May 2-3 FOMC meeting which saw a 25 basis point rise in interest rates. The market then interpreted his Fed chairman’s comments as dovish, suggesting a possible pause later this year. This is because the Fed now has to consider financial stability in addition to keeping high inflation in check. Also, his latest JOBS report shows that the unemployment rate has fallen further, meaning the economy is not slowing down.

In this situation, it makes sense to invest in CIBR as well as ChatGPT. We are in the midst of an AI revolution, and cybersecurity companies have an important role to play in mitigating potential damage. Finally, if inflation proves to be stronger, the Fed may need to tighten monetary policy further.