As the world is digitizing and hackers don't rest, cybersecurity is poised to thrive. Okta (NASDAQ:OKTA), CrowdStrike (NASDAQ:CRWD), and Zscaler (NASDAQ:ZS) have been taking advantage of that trend by developing innovative cloud-based solutions that secure computing environments. But investors should remain cautious as the market is already pricing those high-growth tech stocks for outstanding performance over the long term.
Okta: Identity specialist
Okta provides cloud-based identity capabilities. Its workforce-identity product allows employees to log into thousands of applications by using only one Okta account instead of one account per application. And the company's customer identity solution manages the access of its customers' customers.
Okta has been expanding its platform with application authentication and identity-security solutions that detect the misuse of accounts in real time. Management estimated the company's total addressable market is at $55 billion.
With strong execution, Okta grew its number of customers by 28% year over year to 8,950 during the last quarter. And with existing customers spending 21% more than the prior-year period, the company grew its revenue by 43% to $200 million.
However, Okta spent a significant amount of its revenue on sales and marketing and research and development expenses to fuel its growth, which resulted in a loss of $60 million during the last quarter, compared to $43 million one year ago.
As the stock is trading at a lofty price-to-sales (P/S) ratio of 38, the market seems to assume strong growth will continue over the long term, while profitability improves.
Yet with scale, Okta's revenue growth will be decelerating. Management forecast revenue growth to decrease to 37% for the full fiscal year, ending on Jan. 31. And it anticipates revenue to grow annually in the range of 30% to 35% during the next four years.
Thus, the company must deliver flawless execution over the long term to justify its lofty valuation. And even if it does, the stock price upside potential seems limited.
CrowdStrike: Endpoint protection
CrowdStrike has been generating even stronger revenue growth than Okta over the last several quarters, but that growth is decelerating, too. The company developed an innovative and easy-to-use solution that consists of installing a small piece of software to protect end-user devices (computers, laptops, and more). That lightweight software leverages the company's cloud-based central intelligence to identify threats.
During the last quarter, revenue jumped 84% to $199 million, boosted by shelter-in-place orders. With scale, management expects full-year revenue growth to decelerate to 69%, based on the midpoint of the revenue guidance range of $809.1 million to $826.7 million. That forecast remains solid.
This year, CrowdStrike kept expanding its cybersecurity platform with cloud application-protection solutions. But many cybersecurity players are also addressing this new opportunity. For instance, tech-giant Cisco Systems is aiming to acquire Portshift to secure cloud-native applications.
In addition, CrowdStrike partnered with Okta and two other cybersecurity specialists to provide integrated security solutions for remote workers. And last week, it acquired an identity-protection specialist, which means CrowdStrike will be competing with some of Okta's identity advanced security capabilities, too.
Given CrowdStrike's strong performance, the company deserves a high valuation. But with a market cap at 45 times sales, the market is ignoring revenue-growth deceleration, increased risks in addressing new markets, and intensifying competition.
Zscaler: Securing remote access
Zscaler also benefited from stay-at-home orders over the last several months. Indeed, the company provides solutions for workers to securely access the internet and enterprise private applications from anywhere.
During the last quarter, revenue grew 46% to $126 million. However, that growth should wane, as management expects full-year revenue to land in the range of $580 million to $590 million, which corresponds to year-over-year growth of 34% to 37%.
The company is also expanding its portfolio to fuel its growth, but that involves more competition. For instance, it developed cloud application security capabilities, which means it will be competing against CrowdStrike and Cisco in that market.
In addition, extra competitors have shown interest in addressing Zscaler's attractive markets. As an illustration, the legacy cybersecurity vendor Check Point Software will acquire Odo Security to secure remote access to enterprises' applications.
Besides, Zscaler's path to profitability seems uncertain. During the last quarter, losses increased to $49.5 million, compared to $5.3 million one year ago, as the company ramped up its sales force. Sales and marketing spending represented 71% of revenue, up from 57% in the prior-year quarter.
However, with a price-to-sales ratio of 43, the company is priced for phenomenal long-term performance. In the context of intensifying competition, that valuation seems ambitious.