Ticking Time Bombs: 3 Cybersecurity Stocks to Dump Before the Damage Is Done
The cybersecurity market in 2023 is booming as more enterprises adopt digital transformation initiatives to enhance their productivity, efficiency, and customer satisfaction. Unfortunately, these initiatives also expose businesses to various cyber threats, including ransomware, phishing, and data breaches. As a result, cybersecurity is essential to protect the infrastructure that supports the digital transformation efforts of modern enterprises. It has also led to the rise of cybersecurity stocks to sell.
However, not all cybersecurity businesses will be successful in this highly competitive and dynamic market. A plethora of businesses are struggling with churn and the acquisition of new customers amidst a difficult macroeconomic environment.
Without further ado, below is a list of three cybersecurity companies public equities investors would do well to avoid.
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Alarm.com (ALRM)
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Alarm.com (NASDAQ:ALRM) is not a cybersecurity company in the traditional sense. Rather, the firm is a provider of cloud-based security and smart home solutions for residential and commercial customers. The security firm has garnered much brand recognition from its installed hardware that keep physical spaces and infrastructure safe. However, Alarm.com also employs software measures to not only provide a layer of analytics upon the data its hardware captures but also makes use encryption techniques to keep customer data stored safely.
Though the security firm is able to generate recurring revenue, Alarm.com has struggled in recent years to juice up revenue growth numbers due to a lack of customer demand. Much of Alarm.com’s customers are residential, and during times of economic uncertainty or downturn, these kinds of customers can either churn or not be incentivized to pay for more solutions. Case in point, Alarm.com’s revenue growth decline significantly in 2022 and has continued to do so in 2023. Recent guidance projects the security firm to generate at best $887.7 million in revenue in 2023, representing a 22.2% YoY decline in the top-line figure.
Moreover, Alarm.com’s forward price-to-earnings (P/E) multiple is also trading high at 35x, which could suggest there is little upside for multiple expansion from here on out.
Okta (OKTA)
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Okta (NASDAQ:OKTA) is a leading cybersecurity firm I have discussed in a prior piece, and my conviction remains overwhelmingly bearish. The cybersecurity firm develops identity and access management (IAM) solutions for cloud-based applications and platforms. Put slightly differently, Okta enables its customers to securely manage the identities of their employees, customers, and partners across various devices and environments.
While Okta does have a strong position in the fast-growing IAM market, which was driven by the increasing adoption of cloud computing, mobile devices, and remote work, Okta also faces a number of significant challenges that could hamper its future performance. Revenue growth has been on the decline in 2023, due to businesses becoming more thoughtful on their tech-spend, and Okta is still largely unprofitable. Lagging top-line growth and a lack of profitability is a coupling public equities investors should never want to see. This make it one of those cybersecurity stocks to sell.
Ultimately, as traders become more and more weary of high-multiple companies, a sharp sell-off of Okta’s shares could ensue and do severe damage to a number of investors’ fortunes.
BlackBerry (BB)
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Formed way back in 1984, BlackBerry (NYSE:BB) is a former smartphone pioneer that has lost much of its prior handset dominance to the likes of Apple and Samsung. What made having a BlackBerry handset special in those days was the added layer of security. Although BlackBerry is not selling new smartphones anymore, the company has refined these security features in its pivot to provide software and services for cybersecurity, enterprise mobility, and the Internet of Things (IoT).
Furthermore, the company has been able to amass a sizable customer base in regulated industries such as government, healthcare, and finance. However, BlackBerry’s shares also could face formidable obstacles in the future if its turnaround efforts are derailed. Let’s recognize that the cybersecurity company is entering an already highly competitive market with well-established rivals such as Microsoft (NASDAQ:MSFT), VMware (NYSE:VMW), and Symantec. Also, BlackBerry’s stock is sitting at a high valuation – the company has fallen into net loss territory since the pandemic years and revenue growth has not dramatically increased either, leaving valuations at elevated levels.
Investors would perhaps be better off looking into other cybersecurity stocks before placing another bet on whether or not BlackBerry will return to form.
On the date of publication, Tyrik Torres did not have (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.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.
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