Over the past few quarters, there’s been a clear trend in cybersecurity stocks: Established cybersecurity stocks have lagged, while smaller players — perceived as more agile and more innovative — have gained an edge.
Yet, as this earnings season draws to a conclusion, a new trend is emerging. The older and bigger players are regaining lost market share and turning more profitable. And the smaller cybersecurity players? Their earnings have come in short of expectations as their larger rivals pull ahead.
Most of the smaller cybersecurity stocks have been trading at a high premium. At the same time, most of the old timers have been trading at a discount. Clearly, it’s time to rotate and sell the small players that have lost their growth momentum.
Such high valuations can no longer be justified.
Cybersecurity Stocks to Sell: CyberArk (CYBR)
CyberArk (CYBR), a relatively small company with quarterly revenue ranging from $30 to 40 million, is not looking good.
Despite beating estimates at 22 cents per share and revenue reaching the $40 million mark, there’s a glitch. The company lowered its guidance for fiscal year 2016 amid a slowdown in demand for its cybersecurity service.
CYBR stock is a relative newcomer with revenues among the lowest in cybersecurity stocks. And yet it is already reporting a slowdown, even at such an early phase. This makes us question the competitive edge CyberArk has over its peers.
CyberArk has been profitable compared to many of its peers that are losing money. Having said that there are valid reasons to dump CYBR stock: The relatively small firm is trading at a multiple of 74 and growth has stalled out. That means the stock is priced for high growth and is not performing.
Clearly, it’s time to sell CYBR stock.
Cybersecurity Stocks to Sell: FireEye (FEYE)
The earnings per share figure wasn’t exactly cheerful either, with a loss of 75 cents. And if that wasn’t enough, the company lowered its guidance for the rest of the year.
And what did Dave DeWalt, FireEye’s CEO have to say? It’s China’s fault.
No, not because of slower growth or anything even remotely reasonable. It was because China has become “friendlier” when it comes to cyber attacks. The reasoning DeWalt gave was received with raised eyebrows and skepticism among industry watchers. Competitors, too, pointed out that they haven’t heard of a “friendlier” China.
Despite the fact that FEYE Stock shed more than 20% of its value after the dismal report, it’s still not cheap. ANd FEYE lost some of its credibility with the CEO’s China excuse.
Combined with mounting losses, that means FEYE stock is a sell, as downside pressures are likely to continue.
Cybersecurity Stocks to Sell: Palo Alto Networks (PANW)
Palo Alto Networks (PANW) is the biggest among the three in terms of revenue. With an impressive growth and revenues of $930 million in the last quarter.
Nevertheless, with PANW two smaller rivals either missing estimates or lowering forward guidance. There’s a relatively high chance that Palo Alto’s earnings will miss the consensus.
Palo Alto is currently in the red with a loss of $165 million in the second quarter, which was the result of massive R&D and SG&A expenses that ate into income and cash flow.
PANW price-to-sales ratio (a measure of growing companies) is 14, several times higher than its peers. Thus, there is a high likelihood that if the cybersecurity firm misses earnings on Nov. 23 it will hit PANW stock hard.
That, of course, means it’s time to ditch PANW stock.
It’s better to be safe rather than sorry after a painful earnings report.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.