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Avoid These 2 Overvalued Cybersecurity Stocks

The growing demand for cybersecurity solutions has helped stocks in this sector garner significant investor attention over the past year. However, this has caused many cybersecurity stocks to trade at lofty valuations even in the absence of requisite fundamental strength. We think two examples of this are SentinelOne (S) and Rapid7 (RPD). These cybersecurity stocks look significantly overvalued at their current price levels. So, they are best avoided now.

As organizations move quickly to adopt digital ways of doing business, ransomware attacks and other cybercrimes are increasing rapidly. Thus, the rise in digital defenses to identify cyberattacks and protect devices should drive the cybersecurity industry’s growth this year. 

Several organizations are spending significant amounts of money to strengthen their security infrastructure, protect client data, and prevent cyber-attackers. The global cybersecurity market is expected to reach $281.74 billion by 2027, registering a 12.6% CAGR.

However, not all cybersecurity companies are expected to benefit from the industry tailwinds. SentinelOne, Inc. (S) and Rapid7, Inc. (RPD) are currently trading at price levels that are not consistent with their bleak growth prospects. So, we think it could be wise to avoid these overvalued stocks now.

SentinelOne, Inc. (S)

Incorporated in 2013, S is a Mountain View, Calif.-based cybersecurity provider that has developed an artificial intelligence (AI) extended detection and response (XDR) platform, Singularity Platform, to enable autonomous cybersecurity defense. S' subscription tiers include Singularity Core, Singularity Control, and Singularity Complete.

For the fiscal third quarter ended October 31, 2021, S' revenue increased 128.1% year-over-year to $56.02 million. However, the company's total operating expenses grew 134.7% from their year-ago value to $103.04 million. Its loss from operations rose 127% from the prior-year quarter to $67.37 million. And the company's net loss increased 127.5% year-over-year to $68.6 million.

S' EPS is estimated to decrease 18.6% per annum over the next five years. The stock has declined  33.8% in price over the past three months.

In terms of forward Price/Book, S is currently trading at 6.72x, which is 23.3% higher than the 5.45x industry average. In addition, in terms of forward Price/Sales, S is currently trading at 55.25x, which is 1,357.5% higher than the 3.79x industry average. 

It is no surprise that S has an overall D rating, which equates to a Sell in our POWR Rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting. Also, the stock has an F grade for Stability and a D grade for Value and Growth.

Click here to see the additional POWR Ratings for S (Momentum, Sentiment, and Quality). S is ranked #25 of 27 stocks in the D-rated Software - Security industry.

Rapid7, Inc. (RPD)

Boston-based RPD is a cyber security solutions provider that offers advanced security with visibility, analytics, and automation through its Insight platform. The company’s platform includes InsightVM, InsightDR, and InsightConnect. RPD serves a wide range of customers, from technology, energy, financial services, healthcare, and life sciences, to manufacturing, media and entertainment, retail, education, real estate, transportation, and other services.

RPD's total revenue increased 33.1% year-over-year to $139.89 million in the third quarter, ended Sept. 30, 2021. However, its total operating expenses grew 42.2% from their year-ago value to $130.74 million. Its loss from operations rose 91.5% from the prior-year quarter to $34.32 million. And the company's net loss increased 47.6% year-over-year to $37.7 million.

RPD's stock has declined 22.4% in price over the past month and 26.5% over the past three months.

In terms of forward Price/Sales, RPD is currently trading at 9.9x, which is 161% higher than the 3.79x industry average. In addition, its 236.22x forward EV/EBITDA is 1,413.2% higher than the 15.61x industry average.

RPD's POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to a Sell in our proprietary rating system.

Also, the stock has a D grade for Value and Quality. We have also graded RPD for Growth, Momentum, Stability, and Sentiment. Click here to access all RPD's ratings. RPD is ranked #19 in the Software - Security industry.

S shares fell $0.17 (-0.41%) in premarket trading Thursday. Year-to-date, S has declined -18.04%, versus a -4.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Priyanka Mandal

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research.


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