One of the most prominent ways to quiet the bears is to point to the performance of the S&P 500. After all, this collection of 500 prominent U.S.-listed companies incorporates a diverse spectrum of business models, company missions and economic output as its basis of value.
However, one of its most valuable categories — information technology stocks — could be grossly overvalued. If they tumble, so do their auxiliary supports like manufacturing and cybersecurity. This might drive investors to wonder which overvalued cybersecurity stocks to sell before a crash erases their gains.
The reason why cybersecurity stocks could be particularly overvalued is due to their highly speculative nature. Many investors understand the value of a cybersecurity company’s services, but few understand how they work. This has led to fervor among retail investors who have bought in on a ballooning industry due to the fear of missing out. However, cracks are showing in some of the biggest cybersecurity firms today.
SentinelOne (S)
Perhaps one of the bigger disappointments in the cybersecurity industry, SentinelOne (NYSE:S) has not been able to hold on to the progress of its November 2023 rally. Down roughly 19% year-to-date, and 53% since going public in July of 2021, the stock has attempted to assuage investor worries by highlighting improving margins.
While unprofitability is common for fledgling tech companies, it is difficult for a service-providing firm like SentinelOne to justify it. With an earnings call coming this week, investors should consider their options carefully.
If you currently hold the stock, you may be disappointed with the selloff that occurred in the wake of the last earnings call, however, as another price surge is likely, considering the company’s year-over-year improvements. Thus, the best time to sell could be after the May 30 report.
However, it’s unlikely that S stock will provide the steady returns needed to stay relevant in the years to come. Due to its relatively nascent stages as a cybersecurity company, it could struggle with a potential bear market and investor caution.
Okta (OKTA)
Despite consistently improving its revenue and margins, Okta (NASDAQ:OKTA) could suffer from overvaluation. The company has been a sweetheart of Wall Street analysts, even when its primary product for identity management and verification is nothing revolutionary.
Currently, most of the company’s speculative short-term value stems from its continued growth, which is likely to continue as it releases its next earnings report on May 29.
With a price spike imminent, the best time to sell will be directly after the earnings report’s effect goes into full swing. However, in the long run, Okta’s share prices will likely contract, as its real earning potential slows amid an increasingly saturated identity management market.
Moreover, the company’s service is important, but should a recession hit, a lack of new customers will cut into its ability to grow. Thus, due to its current lack of profitability and long-term outlook, investors should consider Okta among cybersecurity stocks to sell after its next earnings report maximizes gains.
Rapid7 (RPD)
Once considered among the leading cybersecurity companies, Rapid7 (NASDAQ:RPD) has fallen from grace lately over exposed vulnerabilities and eroding trust in its services. Despite stellar quarterly financials in its last earnings report, the company has lost roughly 30% of its value year-to-date.
Moreover, its recent Annual Recurring Revenue dip suggests customers may not approve of the way Rapid7 provides their cybersecurity.
While mistakes happen to every service provider, in the world of cybersecurity, reputation is everything. As such, the erosion of customer trust in RPD’s services could cause a snowball of ARR losses over the next few quarters. This, in turn, could cause investors to pull out of the overbought stock, leading to a further drop in price.
Thus, investors should carefully time the sale of their position in Rapid7 to minimize losses before the next earnings report. Moreover, the company’s current situation serves as a warning about one major intangible aspect of cybersecurity companies: their reputation.
On the date of publication, Viktor Zarev 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.