Cybersecurity companies’ valuations are coming under increasing scrutiny as Wall Street analysts question how they will hold up if companies restrict their IT spending. Analysts picked out
Cloudflare
and
Palo Alto
Networks as potentially being hit by worsening sentiment in the sector.
Guggenheim’s John DiFucci lowered his rating on
Cloudflare
(ticker: NET) to Sell from Neutral and introduced a $50 target price for the stock in a research note.
Cloudflare shares were down 3.3% at $67.21 in premarket trading on Monday, having risen nearly 7% last week on its second-quarter earnings report.
DiFucci wrote that Cloudflare’s long-term target of $5 billion in revenue for 2027 looks unlikely, especially given current concerns on spending on cybersecurity. He also noted that Cloudflare is now trading at an enterprise value of more than 16 times its expected recurring revenue
“[The target] would require new annual recurring revenue growth of greater than 50% in every quarter after 2023 – an unlikely scenario regardless of the macro environment, in our view,” Di Fucci wrote.
Previously bullish analysts are also now more skeptical on some other companies. Wedbush Research removed
Palo Alto
(PANW) from its Best Ideas list. A warning on slowing deals from peer
Fortinet
knocked Palo Alto’s stock last week along with companies such as
Zscaler
(ZS) and
CrowdStrike
(CRWD).
“We believe near-term upside [for Palo Alto] is limited given some of the fears around growth in the cybersecurity sector, which is an overhang on the name,” Wedbush’s analysts wrote.
Macroeconomic concerns aren’t the only issue facing the sector. A swath of cybersecurity stocks fell in July when
Microsoft
announced a push into the network edge security sector, a key strength for Palo Alto and
Zscaler.
Palo Alto shares were up 1.4% in premarket trading, having fallen 8% last Friday.
Write to Adam Clark at [email protected]
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