‘What is the alternative?’ SolarWinds increases the profitability of security companies

OAKLAND, Calif. (Reuters) – Cybersecurity providers, including FireEye Inc and Microsoft Corp, failed to prevent a massive network breach disclosed this month by numerous US agencies and companies, but their shares are rising for a second straight week.

The months of penetration revealed weaknesses in security tools and network management programs, particularly SolarWinds Corp’s Orion software widely used to monitor networks.

According to two experts who have studied such scenarios, recalls and scandals involving products such as cars, food and toys tend to hurt stocks in an industry as investors brace for a broad drop in consumer confidence and sales.

But the overflow of the cybersecurity fear was different. Wall Street is betting that governments and businesses – who have invested years in moving to digital infrastructure – will only accelerate purchases of the latest IT tools.

“What is the alternative?” said Venkatesh Shankar, a marketing professor at Texas A&M University.

Airbag recalls or Listeria outbreaks tend to affect stocks within a narrow supply chain, from restaurants and auto dealers to parts and ingredients suppliers, he said.

But “the magnitude of this breach is not just within the software industry,” he said, pointing to SolarWinds’ customers across numerous industries.

Kartik Kalaignanam, a marketing professor from the University of South Carolina, said merchants expect organizations to bolster their defenses, even if it means buying services from companies that have been hacked.

“While you could say that each of them has some flaw in their system, there is a sense that more spending will happen and that the market will generally go up,” said Kalaignanam.

A BlackRock iShares fund of cybersecurity stocks rose nearly 10% last week and rose an additional 3.5% from Thursday this week. FireEye soared to a 5-year high this week, Microsoft hit a 90-day peak, and Palo Alto Networks, which said it blocked SolarWinds break-ins, jumped to an all-time high.

Mark Cash, who analyzes stocks for research firm Morningstar, said the SolarWinds breach “will certainly benefit” security companies. Once summoned to repair defenses, they inevitably get a contract to hold, Cash said.

Shankar and Kalaignanam said they expect stocks in the sector to remain high for about six months to a year.