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Last year, Warren Buffett was asked about arguably the defining technology of our era — artificial intelligence (AI). While acknowledging its potential for good, he also warned about AI’s darker side.
Indeed, he said the technology could lead to a massive rise in fraud. This fear was stoked when the billionaire investor saw a deepfake video of himself, which impeccably mimicked his voice and mannerisms.
In Buffett’s own words: “If I was interested in investing in scamming, it’s going to be the growth industry of all time.”
Huge future growth expected
Of course, the Oracle of Omaha is not suggesting we invest in AI-driven scamming. But here’s the thing. If this area is going to grow exponentially, then surely the anti-scam industry — cybersecurity — is its mirror image.
In other words, where there’s a surge in AI-driven fraud, there’s also going to be a booming market for AI technologies that enhance cybersecurity measures.
And we see this with various industry forecasts. For example, Grand View Research says the global AI-related cybersecurity market is projected to reach $93.75bn by 2030, up from $25.35bn in 2024.
That’s a robust compound annual growth rate of 24.4%!
Two surging stocks
In my own portfolio, I hold two stocks that I think are poised to benefit from this future growth. These are CrowdStrike and Cloudflare.
CrowdStrike sells AI-powered software that detects and stops attacks in real time on laptops, servers, and cloud systems. As threats get more complex in future, demand for its tools should continue growing.
Meanwhile, Cloudflare protects the internet itself, keeping websites, apps, and networks safe from hacks and outages. Over 20% of the web already runs through Cloudflare’s network, and it recently rolled out a ‘pay-per-crawl’ model where websites can charge AI companies to access their content.
However, both stocks are very expensive after rising substantially over the past year. If forthcoming quarterly results disappoint — on revenue or profit growth (or both) — then they could fall back sharply.
Let’s just say I doubt value-seeking Warren Buffett will be buying either anytime soon!
A basket strategy
For investors wanting exposure to the explosive growth potential of cybersecurity, I think it might be best to consider a basket approach. That is, instead of picking one or two stocks, an option could be the iShares Digital Security UCITS ETF (LSE:LOCK).
This exchange-traded fund (ETF) offers diversified exposure to 110 companies in the cybersecurity/digital-security ecosystem, including CrowdStrike and Cloudflare. The top three holdings are Ciena (up 119% year to date!), Arista Networks, and database firm MongoDB.
Not only does this reduce single-company risk, but the ETF’s total expense ratio is just 0.40%, which is pretty modest for a thematic global fund.
Performance has been very strong — up 87% over five years.
The ETF isn’t perfect, of course (no investment is). And one risk I see here is that the fund’s overall price-to-earnings is still quite high, at just over 30. So the product could underperform for a while if tech stocks sell off aggressively, which periodically happens.
Longer term, however, I would be flabbergasted if this ETF doesn’t do well. Companies and organisations of all sizes are being forced to beef up their cybersecurity.
With AI accelerating the threats, I expect the firms providing the solutions to grow ever larger.