Beware of These 2 Overvalued Cybersecurity Stocks

: NET | Cloudflare Inc. Cl A News, Ratings, and Charts

NET – The demand for cybersecurity solutions is expected to increase significantly in the near- to mid-term as cyber threats continue to grow and affect increasing numbers of organizations as they adapt to the digital era. However, Cloudflare (NET) and Zscaler (ZS) are trading at lofty valuations now and we think are overdue for a price correction. So, it’s wise to avoid them now. Let’s look closer.

Several cyber hacking incidents—the most notable being the SolarWinds cyber hack last December—have highlighted the importance of advanced cybersecurity solutions. As the world becomes increasingly digitized (more dependent on digital operations and solutions), the demand for cybersecurity solutions is expected to increase exponentially.

However, investors are now mostly focused on cyclical stocks that are expected to do well as the economy recovers. Investors’ sector rotation into cyclical stocks is reflected in Global X Cybersecurity ETF’s (BUG) 9% loss over the past three months compared to SPDR S&P 500 ETF Trust’s (SPY) 7.6% gains.

Although cybersecurity solutions are expected to be in greater demand in the coming months, and many companies in the sector are well positioned to benefit, some overvalued stocks in this space could witness a sell-off in the near term. Examples are Cloudflare, Inc. (NET) and Zscaler, Inc. (ZS). They are  currently trading at price levels that are not justified by their current financials or prospects.  So, we think it’s wise to avoid them now.

Click here to checkout our Cybersecurity Industry Report for 2021

Cloudflare, Inc. (NET)

NET operates a cloud platform that delivers a range of network services to businesses worldwide. The company provides an integrated cloud-based security solution to secure a range of combinations of platforms that include public cloud, private cloud, software-as-a-service applications, and Internet of Things (IoT) devices.

The company is scheduled to release its financial results for the first quarter (ended March 31, 2021) on May 6, after the market closes. Its non-GAAP operating loss was $5.47 million in the fourth quarter of its fiscal year 2020, compared to $18.30 million in the prior-year period. Its non-GAAP net loss for the quarter was  $7.45 million compared to $16.38 million in the prior-year period. And its  non-GAAP loss per share was $0.02 compared to $0.06 in the year-ago period.

In terms of forward Price/Cash Flow, NET’s 1,002.38x is significantly higher than 22.26x industry average. In terms of forward EV/EBITDA, the stock’s 595.80x is 3,490.6% higher than the 16.59x industry average. Analysts expect its EPS to remain negative in its fiscal year 2021. The stock has lost 3.4% over the past three months and closed yesterday’s trading session at $80.19.

NET’s poor prospects are apparent in its POWR Ratings. It has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an F grade for Value, and a D grade for Stability. Click here to see NET’s ratings for Sentiment, Quality, Momentum and Growth as well. NET is ranked #23 of 24 stocks in the D-rated Software – Security industry.

Zscaler, Inc. (ZS)

Cloud-based security company ZS delivers  a platform that is built as a multi-tenant, distributed cloud service designed to scale and deliver real-time insights into security issues. It mainly offers two principal cloud services—Zscaler Internet Access (ZIA), and Zscaler Private Access (ZPA). The company serves customers in various industries, including  airlines and transportation, consumer goods and retail, and financial services.

ZS’  operating loss was $53.90 million in the fiscal second quarter ended January 31, compared to $30.30 million loss in the prior-year period. ZS’ net loss came in at $67.50 million compared to $29.2 million in the year-ago period. Also, its loss per share was  $0.50 compared to $0.23 in the prior-year period.

In terms of forward non-GAAP P/E, ZS’s 442.34x is 1,681.5% higher than the 24.83x industry average. In terms of forward EV/EBIT, the stock’s 387.17x is 1,776.5% higher than the 20.63x industry average. The stock has lost 17.9% over the past three months and closed yesterday’s trading session at $175.48.

ZS’ POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The stock has a D grade for Value and Stability also.

Click here to see ZS’ ratings for Sentiment, Quality, Momentum and Growth. ZS is ranked #19 in the same industry.

Click here to checkout our Cybersecurity Industry Report for 2021


NET shares were trading at $79.98 per share on Wednesday afternoon, down $0.21 (-0.26%). Year-to-date, NET has gained 5.25%, versus a 11.90% rise in the benchmark S&P 500 index during the same period.


About the Author: Nimesh Jaiswal


Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...


More Resources for the Stocks in this Article

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