Spending to battle network chaos

How recent high-profile network attacks could boost the need for certain types of security software.

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The most important person for nearly every CEO is the head of information technology (IT), and the most important person for every head of IT is the chief security officer—especially following the recent string of high-profile ransomware attacks in the U.S. and other parts of the world, contends Fidelity's Ali Khan.

"Chief security officers are under pressure to spend on the right solutions to protect their organizations," says Khan, portfolio manager of Fidelity® Select Software and IT Services Portfolio (FSCSX). "The number of ransomware events could surge in the next decade, and I think select network security companies will be at the forefront of protecting against this kind of chaos."

Hackers who instigate ransomware attacks freeze network computer systems, then extort money from enterprises to bring them back online. So far in 2021, these attacks have targeted U.S. energy infrastructure, the largest meat producer in the world, a major ferry operator in Massachusetts, the Washington, D.C., Metropolitan Police Department, several computer manufacturers, and an automaker.

Industry research group Cybersecurity Ventures predicts ransomware will cost victims about $265 billion annually by 2031, with a new attack every two seconds.

"This is a huge global problem that I don't think is going away soon," Khan says. "It's going to require the help of our federal government, state officials, and the expertise of network security companies to limit the damage from these types of attacks."

He notes that some industry leaders are working hard to make both corporate and government networks safer.

Khan cites a handful of fund holdings as of midyear that are direct plays on this trend, including Palo Alto Networks (PANW), a fast-growing network security company that provides next-generation firewall appliances to keep intruders out, as well as a threat detection system powered by artificial intelligence. Khan considers the company a holistic security provider and a leader in cloud-based security.

Proofpoint (PFPT) helps affected companies stop ransomware attacks and other threats and understand the individual risk people within an organization pose from a security standpoint. He adds that Forrester Research recently recognized the company as a leader in enterprise email security.

FireEye (FEYE) offers on-premise and cloud-based security software that protects both networks and email systems. Khan says the company's Mandiant Incident Response software is a premier brand and go-to solution when systems are breached. He believes the company is working to boost recurring revenue, displace legacy vendors, and better compete against Palo Alto Networks and other rivals.

Tenable Holdings (TENB) provides both on-premise and cloud-based vulnerability management software, has a strong market position among U.S. government customers, and is recognized for accurately covering security vulnerabilities.

Lastly, Microsoft (MSFT) is viewed as a tangential cybersecurity player, since Windows 10 offers built-in ransomware protection as a first line of defense. Khan adds that security is part of the value proposition of Microsoft's cloud business, including Office 365 and Azure.

"More spending with any of these software providers doesn't guarantee network safety, but a lot of customers remain very vulnerable to ransomware, and these are companies that I think are helping to provide answers for how to deal with it," Khan says.

Fidelity® Select Software and IT Services Portfolio held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbol above.

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