Wait to buy the dip in these 2 cybersecurity stocks

Key Points

• Analysts cut ratings for two key cybersecurity stocks and send the entire complex lower; a top is in, but how far will they fall?
• Crowdstrike and Zscaler trade above the analyst's consensus, suggesting a 7% to 15% decline to solid support levels. 
• The next visible catalyst is the CQ4 results due in March, but strength is priced in, and the bar is high; share price may move even lower. 

Several analysts' revisions and reports have hit the market that have cybersecurity stocks moving lower. The news has names like Cloudflare NYSE: NET to Palo Alto Networks NASDAQ: PANW down 2.5% to over 4%, but not for any change in the business outlook. 

Business spending centered on digitizing everything, expansive growth of data centers, and the growing threat of cyber attacks support cybersecurity stocks, and they are not likely to stop growing soon. That suggests a buy-the-dip opportunity is at hand. 

The problem is that many cybersecurity stocks trade at wickedly high valuations with slowing growth, a cause for concern. The takeaway is that a top is in for these stocks; the question is how deep they will fall and how soon they will rebound. Because so much strength is already priced into the market, the answer may be profound and not soon. 

Crowdstrike Holdings Inc. leads the pack

Crowdstrike Holdings Inc. NASDAQ: CRWD has led the pack regarding its share price increase and valuation. The stock is up nearly 200% in the last 12 months and trades nearly 100x its earnings. 

That is 40x greater than cyber-security powerhouse Palo Alto Networks, which is growing at a double-digit pace. Regarding growth, Crowdstrike should sustain solid double-digit growth in F2025/C2024, but it will slow down from the low 40% to the high 30% range to 30% for the year. That brings the valuation down, but not quickly enough to keep the market rallying without corrective action. 

Westpark cut its rating from "buy" to "hold," and the market fell 4%; it was ready to sell and take profits. Westpark analysts have concerns about the valuation relative to near-term revenue and earnings expectations but think this company will continue to operate well. 

Westpark gave no price target, but CRWD shares are trading well above the consensus, about 15%, suggesting downward pressure in share prices will continue until a new catalyst emerges. That may be the FQ4 results due in early March. The caveat is that analysts have only raised their estimates since the last report and may have set the bar too high to provide one strong enough to take this stock to a new high. 

Zscaler Inc. hits the ceiling, with growth expected to slow

Zscaler Inc. NASDAQ: ZS is another cyber security stock expected to continue producing robust growth and earnings that have outrun its proper valuation. This stock is trading at nearly 100x earnings, the same as Crowdstrike, with growth slowing from the high 40% range in 2023 to the 30% range in 2024, and growth is forecasted to be in the 20% range next year. While the company will grow into its valuation, the growth is priced into the stock at these levels, prompting Keybanc to initiate at Sector Weight, stating the stock is “simply too expensive.” 

In the eyes of Keybanc, Zscaler is a leading player in the zero-trust SASE security space, which should grow by 27% by 2028. However, larger-scale players such as Palo Alto Networks, Cisco and even Microsoft make it difficult for Zscaler to grow its market share. Keybanc thinks management will prioritize top-line growth over profits, creating a headwind for the valuation. 

Zscaler is rated a "moderate buy" by the analyst community and comes with a possible 30% upside at the high end of the target range. However, Zscaler trades about 8% above the consensus figure, which has been relatively steady over the trailing 12-month period. Shares of the stock may fall back to that level, near $206, before moving higher. If support at $206 fails, this stock and its peers could be in a much deeper decline. A 40% price cut would align the stock with market leader Palo Alto Networks but take it to the low end of its trading range, which is unexpected. 

The risk with that outlook is that Zscaler and Crowdstrike tend to beat on the top and bottom line, supported by secular trends, and have solid double-digit growth in the forecast. Assuming outperformance continues, the analysts will raise their forecasts and align the valuation better. In that scenario, the price action in ZS may fall below $206 but find support well above the bottom of the trading range. The most promising targets are the 30-day EMA near $218, but the middle of the trading range near $192, just below the consensus target, is more likely to produce the desired rebound.