Please ensure Javascript is enabled for purposes of website accessibility

Why CrowdStrike, Varonis, and Cloudflare Soared on Tuesday

By Anders Bylund - Mar 9, 2021 at 5:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Pull up a chair and grab some coffee. Economics can be fun sometimes.

What happened

Many of the business technology and cybersecurity specialists that saw their share prices decimated over the last week breathed a huge sigh of relief on Tuesday. Cloud security expert Cloudflare (NET 8.70%) closed the day 10.8% higher, endpoint security specialist CrowdStrike (CRWD 2.99%) gained 10.8%, and data protection veteran Varonis (VRNS 2.61%) posted a gain of 8.5%. None of these companies had any news of their own to share today, and the cybersecurity industry was pretty quiet as a whole. These big moves were triggered by a downtick in U.S. Treasury bond yields, offering a respite from relentlessly rising yields over the last month.

^FVX Chart

^FVX data by YCharts

So what

How do Treasury bond yields relate to the market value of leading cybersecurity stocks? Let me explain.

These companies have enjoyed booming business during the coronavirus lockdowns as corporations of every kind embraced remote work. Tight security is a must when your company's most important data is accessed from a laptop in the kitchen, and all three of the companies mentioned above can find solutions for exactly that dilemma.

Hence, their stock prices are skyrocketing. Varonis has gained 122% over the last 52 weeks, even after today's sharp pullback, and that's the laggard of the bunch. Cloudflare's one-year returns currently stand at 204%, and CrowdStrike is the leader of the pack with a 283% gain.

Furthermore, our three musketeers generally qualify as high-octane growth stocks. A laser focus on maximum revenue growth often leaves the bottom line printed in red ink, which makes profit-based valuation methods difficult to use. In this case, Cloudflare and Varonis have posted negative earnings and free cash flows on a trailing basis. CrowdStrike also generated negative earnings, but the stock is trading at 164 times the company's free cash flows of $250 million. These lofty valuation ratios make the stock prices sensitive to changes in market risks and in the tools investors use to mitigate those risks.

Therefore, many investors are more likely to sell some of their high-flying growth stocks when risk-free assets such as Treasury bonds can offer a reasonable return on their investment. That's how rising bond rates translates into falling growth stocks, and lower bond rates can let the growth stocks fly high again. Today was a fine example of the latter.

A board balancing over a central support with bills of different denominations on one side and the word Risk on the other

Image source: Getty Images.

Now what

Skyrocketing growth stocks are not every investor's cup of tea. There's a time and a place for focusing on stable value investments instead, especially when the air on Wall Street is starting to smell like an oncoming downturn. Small changes in bond yields can make a big difference in times like these.

That doesn't mean that Cloudflare, Varonis, or CrowdStrike are bad investments. If you have the stomach for a bit of increased market risk, and would be willing to ride out some bumps in the road ahead, all three serve an important growth market and could deliver impressive returns in the long run. To each his own, as the adage goes. Growth investors like exciting growth stocks, value investors prefer stable value stocks, and the tension between them generates both risk and wealth-building opportunity over time.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

CrowdStrike Holdings, Inc. Stock Quote
CrowdStrike Holdings, Inc.
CRWD
$142.64 (2.99%) $4.14
Varonis Systems, Inc. Stock Quote
Varonis Systems, Inc.
VRNS
$32.27 (2.61%) $0.82
Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$58.00 (8.70%) $4.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
327%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.