Why Cybersecurity Stocks Got Hammered Monday

What happened

Shares of cybersecurity stocks tumbled on Monday as the stock market suffered its worst day since 2008. A combination of the escalating novel coronavirus outbreak and a collapse in oil prices driven by a price war wreaked havoc on most stocks. Here's how some major cybersecurity players fared:

Data source: Yahoo! Finance..

So what

The panic in the stock market on Monday hit pretty much everything, but these cybersecurity stocks underperformed the major indices. Valuation could be part of the reason for the underperformance.

Image source: Getty Images.

Fortinet is expected to produce revenue of $2.54 billion this year, up 18% from 2019. The average analyst estimate for adjusted earnings per share for 2020 is $2.72. Those estimates put the price-to-sales ratio at nearly 6, and the price-to-earnings ratio at 32. If the novel coronavirus outbreak hurts Fortinet's business this year, the company could fall short of those estimates.

Palo Alto stock is in a similar boat. Analysts expect revenue of $3.37 billion this year, up 16.3%, and adjusted earnings per share of $4.60. Shares currently trade for 4.7 times sales and 34 times adjusted earnings. Revenue growth has slowed down substantially in recent quarters, and the company missed expectations and lowered its full-year outlook last month.

Shares of Zscaler had already crashed going into Monday's market turmoil. The stock is down a whopping 51% from its 52-week high. Now valued at $5.26 billion, shares of Zscaler are still exceptionally pricey. Analysts expect revenue of $415.9 million and adjusted EPS of $0.16 this year, putting the price-to-sales ratio at 12.6 and the price-to-earnings ratio at 275. Revenue is expected to grow by about 37%.

BlackBerry had the roughest day of the bunch. Analysts expect revenue of $1.1 billion and adjusted EPS of $0.08 this year, good for a price-to-sales ratio of 1.8 and a price-to-earnings ratio of 48. In BlackBerry's most recent quarterly report in December, the company beat expectations and grew its software and services revenue by 26%.

Cyberark has consistently beat analyst expectations, although its growth rate slowed down toward the end of last year. The coronavirus panic has knocked the stock down about 37% since early February. Revenue of $515.5 million and adjusted EPS of $2.33 are expected this year, putting the price-to-sales ratio at 6.5 and the price-to-earnings ratio at 38.

All of these stocks are priced at a premium before considering the potential negative impact of the coronavirus outbreak. If business activity slows down in the U.S. as the outbreak runs its course, those estimates could prove overly optimistic.

Now what

For long-term investors, big drops like this represent an opportunity to accumulate more shares at lower prices. If you liked these stocks before Monday's rout, they can now be bought at a discount.

While it's hard to predict how the outbreak will affect revenue and earnings, it's likely that each of these companies will feel at least some pain from the escalating situation. This pain will be temporary, but the stocks could suffer further if the market continues to head lower.

Investors should brace themselves for more volatility, but remember that day-to-day fluctuations mean nothing in the long run.