Beware! 3 Cybersecurity Stocks Waving Massive Red Flags Right Now

Stocks to sell

In recent years, the cybersecurity market in 2023 has boomed as more and more businesses and individuals begin relying on digital platforms and cloud services. This has led to the emergence of cybersecurity stocks to sell.

However, since the U.S. Federal Reserve began hiking interest rates early last year, the global economic outlook has become cloudy, thus making it difficult for enterprises to make long-term decisions. As a result, not all cybersecurity stocks have been worth investing in. Cybersecurity businesses facing challenges to expand customer count and launch new products have seen their stocks plummet this year.

Below I will examine three cybersecurity stocks that are still waving massive red flags in September 2023.

Okta (OKTA)

An image of a hacker on a laptop with icons of messages and data behind him

Source: jossnat / Shutterstock

Okta (NASDAQ:OKTA) is a provider of identity and access management solutions for cloud applications and devices. The cybersecurity firm has been able to expand revenue growth and its customer base rapidly since the advent of the COVID-19 pandemic left many businesses operating remotely. From 2020 to 2022, in particular, Okta grew annual revenues at an average of 47%, benefitting from increased demand for cloud security and identity solutions.

Unfortunately, in 2023, Okta’s profitability remains in the red, and top-line growth appears to be slowing. In the company’s first-quarter earnings print, Okta was able to beat Wall Street’s estimates and even delivered decent guidance, but YoY revenue growth for the quarter lagged behind that of prior years. Moreover, during the Q1 earnings call, management revealed they were worried about the macroeconomic environment and its potentially negative impact on the cybersecurity firm’s future growth.

With growth remaining lethargic in their second quarter print and valuation already too high, I believe Okta’s shares have little opportunity to rise in the near term. Investors should, at the very least, proceed with caution. All in all, it’s one of those cybersecurity stocks to sell.

Palo Alto Networks (PANW)

An image of a fingerprint with a lock icon in the center, over a motherboard

Source: JLStock / Shutterstock

Another stock investors should consider avoiding is Palo Alto Networks (NASDAQ:PANW). Palo Alto Networks is a provider of network security solutions for enterprises and cloud environments, and similar to many other cybersecurity companies, Palo Alto has struggled with maintaining high revenue growth amidst a difficult economic environment.

Even in the past, the cybersecurity firm embraced costly acquisitions to expand top-line growth, which often lagged behind competitors. In a low-interest rate environment, this kind of strategy could have worked, but as interest rates have climbed to decades highs, the costs are beginning to bubble at the surface.

Palo Alto Networks has about $1.9 billion of debt on its most recent balance sheet, which has caused interest payments to eat into operating income. The company’s valuation also makes the stock a concern. Palo Alto shares trade at 44.3x forward earnings and given there is still much uncertainty concerning the future state of the U.S. and global economy, traders could be less willing to pay for these kinds of high multiples and trigger a devaluation, which would be a bad day for current investors.

Zscaler (ZS)

A close-up shot of fingers over a keyboard with blue and white text overlaid.

Source: Shutterstock

Zscaler (NASDAQ:ZS) is the final entry on this list, and the company provides cloud-based security solutions for enterprises and governments. The cybersecurity firm also operates in the SSE (secure-service-edge) software space, which includes a collection of cloud-based network security services. These services are broken down into three categories — secure web gateways (SWGs), cloud access security brokers (CASBs), and zero trust network access (ZTNA) frameworks.

Similar to Okta, Zscaler’s revenue growth catapulted to new heights after 2020, most likely driven by COVID-19 tailwinds. However, growth has slowed in recent years due to economic uncertainty. Zscaler ended its fiscal year 2023 (ended on July 31st) with revenues up 48.2% YoY. Though this kind of growth is nothing to scoff at on the surface, what management has given for guidance leaves little to be fortunate about. The cybersecurity firm expects to, at best, generate just over $2 billion in revenue for fiscal year 2024, which would represent a relatively moderate YoY growth rate of 27.7%.

Ultimately, while annual growth seems to be lagging and shares trading around an obscene 69.3x forward earnings, it’s hard to recommend Zscaler as a long-term investment. This makes it one of those cybersecurity stocks to sell.

On the date of publication, Tyrik Torres did not have (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.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.

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