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2 Cybersecurity Stocks Wall Street Believes are Overvalued

Cyber-attacks are increasing due in-part to the accelerated pace of digital transformation and remote working trends. To combat such attacks, businesses are increasing their cybersecurity spending significantly. While this should benefit many cybersecurity companies, some stocks in this space are trading at lofty valuations. Indeed, Wall Street analysts expect overvalued cybersecurity stocks Zscaler (ZS) and Qualys (QLYS) to witness a price pullback in the near term. So, we think these names are best avoided now. Read on.

As organizations rapidly adopted the digital ways of doing business amid the pandemic, the need to protect client data and prevent cyber-attackers from gaining access to the system has led to rising investments in cybersecurity infrastructure. According to the Gartner 2021 CIO Agenda Survey, 61% of the more than 2,000 CIOs surveyed are expected to increase cyber/information security investment this year.

Due to the increase in ransomware attacks and growing incidents of cybercrimes, several organizations are spending large amounts on cybersecurity to strengthen their security and protect critical data. The global cybersecurity market is expected to reach $345.4 billion by 2026, registering a 9.7% CAGR from 2021 - 2026.

However, not all cybersecurity companies are expected to benefit from the industry tailwinds. Wall Street analysts believe cybersecurity stocks Zscaler, Inc. (ZS) and Qualys, Inc. (QLYS) are currently trading at price levels that are not justified by their current weak financials and growth prospects. So, it could be wise to avoid these stocks now.

Click here to checkout our Cybersecurity Industry Report for 2021

Zscaler, Inc. (ZS)

A San Jose, Calif.-headquartered cloud-based information security company, ZS, provides Zscaler Internet Access solution and Zscaler Private Access solution to facilitate  secure device access to externally managed applications and internally managed applications. The company also offers Zscaler Digital Experience, which  comprises Zscaler Cloud Security Posture Management and Zscaler Cloud Workload Segmentation to reduce the risk of data breaches. In addition, Zscaler Central Authority; Zscaler Enforcement Node; and Zscaler Nanolog Server modules are some of the platforms through which the company works.

In May, ZS agreed to acquire Smokescreen Technologies, a defense and deception technology company, to integrate its active defense into ZS’ Zero Trust Architecture and enhance its cyberattack detection capabilities. While this acquisition will establish ZS as the industry’s first security vendor to integrate such sophisticated technology, the increased expenses could negatively affect its cash balance.

During the third quarter, ended April 30, 2021, ZS’ revenue increased 60% year-over-year to $176.4 million. But the company’s total operating expenses increased 70.3% from their year-ago value to $181.28 million. Its net loss increased 202.3% from the prior-year quarter to $58.46 million, while its loss per share came in at $0.43 during this period. Also,  its cash declined 14.4% year-over-year to $106.59 million for the nine months ended April 30, 2021.

Analysts expect the company’s EPS to decrease 14.3% year-over-year to $0.12 for the next quarter, ending October 2021. In terms of forward non-GAAP P/E, ZS is currently trading at 587.10x, which is 2,280.4% higher than the 24.66x industry average . And in terms of its forward EV/Sales, the stock is currently trading at 55.42x, 1,248.2% higher than the 4.11x industry average.

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 POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Also, the stock has an F grade for Value, and a C grade for Stability and Momentum. We’ve also graded ZS for Growth, Sentiment, and Quality. Click here to access all of ZS’ ratings. ZS is ranked #19 of 26 stocks in the D-rated Software-Security industry.

Qualys, Inc. (QLYS)

Founded in 1999, QLYS was the first company to deliver vulnerability management solutions as applications through the web using a SaaS model. The company provides QLYS Cloud Apps, including Threat Protection, Security Assessment, Detection and Response, Cloud Security Assessment, and other solutions. QLYS is headquartered in Redwood City, Calif.

For the second quarter, ended June 30, 2021, QLYS’ revenue increased 12% year-over-year to $99.7 million. However, the company’s total operating expenses increased 9.8% from year-ago value to $48.79 million. In addition, QLYS’ interest income declined 59.3% from its  year-ago value to $567,000. Moreover, its net income came in at $21.14 million, representing a 19.7% decline year-over-year.

In terms of forward EV/Sales, QLYS is currently trading at 9.98x, which is 142.9% higher than the 4.11x industry average. And in terms of its forward Price/Sales, the stock is currently trading at 11.12x, which is 168.9% higher than the 4.13x industry average. The stock has declined 4.7% year-to-date.

QLYS’ POWR Ratings reflect its poor prospects. Click here to see all of QLYS’ component grades. The stock is ranked #6 of 26 stocks in the Software-Security industry.

Click here to checkout our Cybersecurity Industry Report for 2021

ZS shares were trading at $277.98 per share on Tuesday morning, down $0.19 (-0.07%). Year-to-date, ZS has gained 39.19%, versus a 21.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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