While the cybersecurity industry has generally been a bastion of strength in the tech sector, not all stocks are created equal. Despite the rising threats that drive demand for digital protection, some companies in this space are showing signs of weakness that could lead to significant declines in their stock prices.
Investors often flock to cybersecurity stocks as they represent a growing need in an increasingly digital world. As of 2023, the market is valued at $222 billion and is expected to grow at a CAGR of 12.3%, reaching approximately $500 billion by 2030. The increasing prevalence of cyber-attacks, driven by the widespread use of e-commerce platforms, smart devices, and cloud technologies, is a key factor fueling this market growth.
Although the overall market is expected to continue its robust growth momentum, investors’ enthusiasm can sometimes lead to overvaluation or overlook the fundamental issues that some companies might face.
For those looking to safeguard their investments, stepping back from certain high-risk cybersecurity stocks before the end of July might be wise. Here are three such stocks showing troubling signs that investors should consider divesting to avoid potential losses.
CrowdStrike (CRWD)
CrowdStrike (NASDAQ:CRWD) is a leader in cloud-delivered endpoints and cloud workload protection. However, recent events and the company’s current valuation suggest it may be time for investors to consider selling their stakes.
CrowdStrike’s stock has faced significant challenges recently due to a technical glitch that caused a global IT outage. This incident has raised concerns about the company’s software reliability and potential financial liabilities from disrupted businesses worldwide. Despite the company’s rapid response to deploy a fix, the fallout could impact its reputation and financials.
Moreover, despite strong historical performance, CrowdStrike’s valuation raises concerns. The company’s stock trades at a forward PE 346x, significantly higher than the industry average. This premium valuation comes amid a backdrop where other leading cybersecurity firms are trading at much lower multiples.
The cybersecurity market is highly competitive, with numerous players vying for market share. Companies like Palo Alto Networks and Fortinet continue to expand their offerings, potentially squeezing CrowdStrike’s competitive edge and forcing it to invest heavily in sales and marketing to retain its leadership position.
Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) is experiencing significant challenges that are impacting its market performance and operational dynamics. Over the last 12 months, Fortinet’s stock has declined 25%, with flat returns over the past three years, marking a stark underperformance relative to its peers.
The primary concern for Fortinet has been the declining sales of its firewall products. This trend, which began manifesting in mid-2023, has continued into 2024, adversely affecting the company’s consolidated results and investor sentiment.
Fortinet’s financial health has shown signs of strain. The company’s revenue growth has decelerated significantly, with forecasts suggesting a continuation of this trend. Analyst consensus reflects a decline in expected EPS growth. This slowdown is a critical red flag, indicating potential long-term growth issues, particularly as the company faces stiff competition from pure-play cloud providers like CrowdStrike and hybrid competitors like Palo Alto Networks.
Moreover, Fortinet’s current valuation does not adequately reflect the risks associated with its slowing growth and operational challenges. The stock trades at a premium compared to some of its peers, which is hard to justify given the company’s underwhelming revenue growth projections and ongoing strategic misalignments.
CyberArk (CYBR)
CyberArk (NASDAQ:CYBR) is an identity security company that faces several challenges, including intense competition, market saturation, and high stock valuation.
As of the latest market close, CyberArk’s shares are trading at a premium, fueled mainly by its past performance and market optimism surrounding its subscription-based revenue model. While the company’s recent growth is commendable, the current valuation has made the forward PE ratio hard to justify, even with the company’s robust growth narrative.
CyberArk faces fierce competition from larger players like Microsoft and Palo Alto Networks, which have deeper pockets and broader product ecosystems. Additionally, while strategically sound, the company’s focus on identity security directly competes with newer market entrants that might offer more innovative solutions or more aggressive pricing strategies. The threat from these disruptive technologies and business models could undermine CyberArk’s competitive position and erode its market share.
On the date of publication, Mohammed Saqib did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.