The demand for cybersecurity solutions is expected to increase significantly in the near- to mid-term as cyber threats continue to grow and affect increasing numbers of organizations as they adapt to the digital era. However, Cloudflare (NYSE:NET) and Zscaler (NASDAQ:ZS) are trading at lofty valuations now and we think are overdue for a price correction. So, it’s wise to avoid them now. Let’s look closer.Several cyber hacking incidents—the most notable being the SolarWinds cyber hack last December—have highlighted the importance of advanced cybersecurity solutions. As the world becomes increasingly digitized (more dependent on digital operations and solutions), the demand for cybersecurity solutions is expected to increase exponentially.
However, investors are now mostly focused on cyclical stocks that are expected to do well as the economy recovers. Investors’ sector rotation into cyclical stocks is reflected in Global X Cybersecurity ETF’s (BUG) 9% loss over the past three months compared to SPDR S&P 500 ETF Trust’s (SPY) 7.6% gains.
Although cybersecurity solutions are expected to be in greater demand in the coming months, and many companies in the sector are well positioned to benefit, some overvalued stocks in this space could witness a sell-off in the near term. Examples are Cloudflare, Inc. (NET) and Zscaler, Inc. (ZS). They are currently trading at price levels that are not justified by their current financials or prospects. So, we think it’s wise to avoid them now.