As the digital landscape expands, so too does the complexity and frequency of cybersecurity threats. This has propelled the cybersecurity sector to unprecedented importance, turning it into a battleground for corporations and investors alike.

The cybersecurity market is expected to expand to approximately $878 billion by 2034. This represents a robust CAGR of 12.6%. The growth is expected to be driven by the growing necessity for businesses to address sophisticated cyber threats, the rise in automotive hacking, and challenges arising from the increasing adoption of remote working.

While the sector remains critical, certain companies within it are showing signs of strain that could lead to significant downturns in their stock prices. These vulnerabilities stem from a failure to capture market share or financial instabilities exacerbated by rapid shifts in market demand. As we delve into the specifics, here are three cybersecurity stocks that appear to be on shaky ground this August, making them prime candidates for investors to consider selling before potential declines erode their investment value.

Okta (OKTA)

Okta (NASDAQ:OKTA) has been navigating a challenging macroeconomic environment. The company’s recent financial reports indicate a troubling trend in customer acquisition and retention, which are crucial for sustaining long-term growth.

In the most recent fiscal quarter, Okta posted a 19% year-over-year revenue growth, which, on the surface, appears solid. However, deeper metrics such as net quarterly customer additions paint a different picture. This number has seen a significant decline, suggesting potential issues in market penetration and customer satisfaction. Furthermore, the company’s net retention rate has also shown a troubling decline.

Moreover, Okta has experienced multiple security incidents over the past years, with a notable breach in October 2023 that has tarnished the company’s reputation.

While Okta has managed to maintain a strong revenue growth trajectory, its valuation raises concerns under current market conditions. With a forward P/E ratio significantly above the industry average, the stock appears overvalued, particularly when considering the potential risks associated with slowing customer growth and security vulnerabilities. This valuation also does not align well with the company’s profitability metrics, which have shown volatility in recent periods.

Fortinet (FTNT)

Fortinet (NASDAQ:FTNT) has long been recognized for its robust offerings in the cybersecurity space. However, recent market trends and internal challenges suggest that now may be the time to sell the stock.

Fortinet appears to be losing market share to competitors who are quicker to adapt to the cloud-centric future of cybersecurity. Companies like Palo Alto Networks and CrowdStrike have been more aggressive in transitioning to cloud-based offerings, potentially making Fortinet’s appliance-heavy portfolio less attractive to new customers seeking flexible, scalable solutions.

Despite Fortinet’s historically strong profitability, the recent shifts in market dynamics and internal challenges have begun to reflect on its financial performance. With revenue growth slowing and competitive pressures increasing, there’s a real concern that Fortinet’s high valuation might not be sustainable. Trading at a significant premium based on past growth metrics, the stock’s current price may not accurately reflect future risks and earnings potential, which could lead to adjustments and market corrections.

CrowdStrike (CRWD)

CrowdStrike (NASDAQ:CRWD) has recently faced significant challenges that have led to a dramatic drop in its stock value. The company has seen its shares plummet by over 35% following a catastrophic software update glitch that caused a global IT outage affecting millions of Microsoft Windows systems worldwide.

The incident has notably damaged CrowdStrike’s reputation as a reliable cybersecurity provider. Financially, the glitch could have far-reaching consequences on CrowdStrike’s revenue and growth projections. In the aftermath, immediate costs associated with rectifying the failure, potential compensation to affected businesses, and legal liabilities could strain the company’s financial resources. Moreover, the potential loss of customer trust could lead to a slowdown in new subscriptions and possibly increase churn among existing clients.

Prior to the incident, CrowdStrike traded at a premium valuation due to its high growth trajectory and the expanding need for cybersecurity solutions. However, the current crisis could lead to a reevaluation of its valuation multiples. Investors might now demand a higher risk premium, leading to a contraction in the valuation multiple.

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.