Rapid digitization and remote working trends have increased the risks of malicious cyberattacks, which in turn has accelerated the demand for cybersecurity solutions. However, the shares of Fortinet (FTNT), Cloudflare (NET), and KnowBe4 (KNBE) are currently trading at lofty valuations despite their companies’ bleak growth prospects. So, we think it could be wise to avoid these overvalued stocks now.
The increase of digital ways of operating businesses and continuing remote working trends have significantly increased the risk of cyberattacks and ransomware threats. Therefore, organizations are investing heavily in cybersecurity solutions to secure their digital infrastructure and protect client data from unauthorized use. These factors should keep driving the cybersecurity industry’s growth.
Furthermore, the escalating Ukraine-Russia war has given rise to more online cyberattacks since hackers are using the war as a distraction. Also, the Biden administration has warned corporations to strengthen their cybersecurity practices in response to anticipated potential cyberattacks from Russia. The global cybersecurity market is projected to grow at a 13.4% CAGRfrom $155.83 billion in 2022 to $376.32 billion by 2029.
Though the cybersecurity market is expected to grow in the coming months, Fortinet, Inc. (FTNT), Cloudflare, Inc. (NET), and KnowBe4, Inc. (KNBE) don’t seem well-positioned to capitalize on the industry tailwinds. They are currently trading at price levels that are not justified by their bleak growth prospects. So, we think these overvalued stocks are best avoided now.
Fortinet, Inc. (FTNT)
FTNT in Sunnyvale, Calif., provides broad, integrated, and automated cybersecurity solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It offers FortiGate hardware and software licenses that provide security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network acceleration.
FTNT’s operating expenses increased 26.4% year-over-year to $520.40 million in the fourth quarter, ended Dec. 31, 2021. Its cash and cash equivalents stood at $1.32 billion for its fiscal year ending Dec. 31, 2021, while its net cash used in investing activities increased significantly year-over-year to $1.33 billion.
The consensus EPS estimate is expected to decrease 1.9% year-over-year to $0.80 in the first quarter, ending March 31, 2022. However, its stock has declined nearly 6.6% year-to-date and 3.8% over the past three months .
In terms of forward Price/Earnings, FTNT is currently trading at 80.22x, which is 216.7% higher than the 25.33x industry average. Also, in terms of its forward Price/Sales, the stock is currently trading at 12.04x, which is 266.3% higher than the 3.29x industry average.
FTNT’s Power ratings are consistent with this bleak outlook. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
FTNT has a D grade for Value. Within the F-rated Software – Security industry, it is ranked #9 of 30 stocks.
To see additional POWR Ratings for Growth, Quality, Stability, and Momentum for FTNT, click here.
Cloudflare, Inc. (NET)
NET in San Francisco, Calif., is a cloud services provider that delivers services to businesses internationally. The company provides an integrated cloud-based security solution to secure a range of combinations of platforms, including public cloud, private cloud, on-premises, software-as-a-service applications, and IoT devices.
During the fourth quarter, ended Dec/ 31, 2021, NET’s loss from operations increased 66% year-over-year to $41.06 million, while its net loss increased 127.8% from its year-ago value to $77.50 million. The net cash used in financing activities increased 37.7% from its prior-year quarter to $709.32.
The company’s shares have plunged 6.9% in price year-to-date and 10.8% over the past three months.
In terms of forward non-GAAP P/E, NET is trading at 3795.67x, which is 19404.5% higher than the 19.46x industry average. Also, in terms of its forward EV/Sales, the stock is currently trading at 39.41x, which is 1080.4% higher than the 3.34x industry average.
NET’s poor prospects are evident in its POWR Ratings. The stock has an overall D grade, which equates to Sell in our proprietary rating system. It also has an F grade for Value and a D for Momentum and Stability. NET is ranked #21 in the Software – Security industry.
Click here to see the additional POWR Ratings for NET (Growth, Quality, and Sentiment).
KnowBe4, Inc. (KNBE)
KNBE engages in the development, marketing, and sale of its Software-as-a-Service-based security awareness platform. The Clearwater, Fla., company offers a platform for incorporating security awareness training and simulated phishing with analytics and reporting that helps organizations manage the ongoing problem of social engineering.
In the fourth quarter, ended Dec. 31, 2021, KNBE’s operating expenses increased 29% year-over-year to $52.61 million. The net cash used in financing activities increased significantly from its year-ago value to $24.00 million for its fiscal year ending Dec. 31, 2021, while its cash and cash equivalent stood at $273.72 million.
The $0.02 consensus EPS estimate represents a 31% year-over-year decline for the first quarter, ending March 31, 2022. The stock has declined 34.3% in price over the past nine months.
In terms of forward Price/Book, KNBE’S 17.11x is 241.3% higher than the 5.01x industry average. In addition, its 12.17x forward Price/Sales is 270.4% higher than the 3.29x industry average.
KNBE’s weak fundamentals are reflected in its POWR ratings. The stock has a D grade for Stability and Value. In the Software – Security industry, it is ranked #13.
In addition to the POWR Ratings grades I have just highlighted, one can see the KNBE’s rating for Momentum, Growth, Sentiment, and Quality here.
FTNT shares fell $5.13 (-1.53%) in premarket trading Friday. Year-to-date, FTNT has declined -8.02%, versus a -4.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan’s is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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