McAfee Corp. (MCFE - Get Rating) and NortonLifeLock Inc. (NLOK - Get Rating) are two prominent computer software security companies operating in the United States and internationally. MCFE provides integrated security, and trust solutions to consumers, businesses, and governments. While, NLOK provides cyber safety and security solutions as a subscription service for protecting PCs, Macs, and mobile devices against malware, and viruses.

As the digital revolution is increasing issues such as ransomware attacks, malware, and other types of data breaches, the demand for cybersecurity is increasing. As many pandemic-driven trends like remote working, online shopping, and digital payments are expected to continue even in the post-vaccine world, businesses are looking to create a secure environment to guard against data breaches. This should keep driving the demand for privacy solutions offered by leading software security companies like MCFE and NLOK.

While MCFE gained 22.8% over the past three months, NLOK returned 12%. In terms of year-to-date performance, MCFE is the clear winner with 16.7% gains versus NLOK’s negative returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

This month, MCFE collaborated with LG to pre-install a 30-day free trial of McAfee security on LG PCs in Korea and worldwide. This will enable MCFE to provide its consumers with the right security tools to ensure they can secure their digital lives and protect their personal information.

Also, in February, MCFE and Ingram Micro Inc. expanded their alliance to provide access to McAfee products and solutions across Ingram Micro’s global distribution network. MCFE launched its SAAS portfolio on Ingram’s platform and intends to expand its portfolio across the company’s e-commerce platforms throughout this year.

Last month, NLOK launched Norton 360 to provide gamers across the globe with strong security and safety habits. This demonstrates the company’s ability to develop features tailored to gamers’ needs and thereby, enhances its product portfolio.

On January 20, 2021, the company appointed Sherrese Smith and Emily Heath to its Board of Directors. Their extensive experience in data privacy and cybersecurity should make an immediate and positive impact on the company as it continues its transformation for growth.

Recent Financial Results

In the third quarter ended September 26, 2020, MCFE’s total revenue grew 10% year-over-year to $728 million, while consumer revenue grew 23% from the year-ago value to $395 million. Total operating income increased 142% from the year-ago value to $128 million. The company’s adjusted EBITDA margins expanded by 470 basis points to 36.4% over this period.

NLOK’s non-GAAP revenue has increased 6% year-over-year to $639 million in the third quarter ended January 1, 2021. The company’s gross profit grew 7.2% from the prior-year quarter to $552 million, while the operating margin was 51% over this period. Operating income increased 45.5% from the year-ago value to $326 million.

Expected Financial Performance

Analysts expect MCFE’s revenue to increase 4% in the current year. The company’s EPS is expected to grow 5.9% in 2021. Moreover, its EPS is expected to grow at a rate of 20% per annum over the next five years.

In comparison, analysts expect NLOK’s revenue to increase 2% in the current year. The company’s EPS is expected to grow 58.9% in fiscal 2021. Moreover, NLOK’s EPS is expected to grow at a rate of 21.9% per annum over the next five years.

Profitability      

MCFE’s trailing-12-month revenue is 1.13 times what NLOK generates. But NLOK is more profitable with a gross profit margin of 85.6% versus MCFE’s 70.5%.

However, MCFE’s levered free cash flow of 19.1% compares favorably with NLOK’s negative returns.

Valuation

In terms of trailing-12-month EV/EBITDA, NLOK is currently trading at 14.73x, 72.3% higher than MCFE which is currently trading at 8.55x. Also, its forward PEG of 2.86x is 302.8% higher than MCFE’s 0.71x.

So, MCFE is the more affordable stock.

POWR Ratings

MCFE has an overall rating of A which translates to a Strong Buy in our proprietary POWR Ratings system. However, NLOK has an overall rating of B which represents a Buy. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree.  

MCFE has a Value Grade of B, which is consistent with its lower-than-industry EV/EBITDA ratio. In comparison, NLOK has a Value Grade of C.

Both MCFE and NLOK have a grade of B for Momentum, which is consistent with their price returns over the past three months.

In terms of Growth Grade, both MCFE and NLOK have a B, consistent with their expected earnings and revenue growth.

Of 24 stocks in the Software – Security industry, MCFE is ranked #2 while NLOK is ranked #5.

Beyond what I stated above, our POWR Ratings system also rates both MCFE and NLOK for Quality, Stability, and Sentiment. Get all of MCFE’s ratings here. Also, click here to see the additional POWR Ratings for NLOK.

The Winner

While both MCFE and NLOK are good long-term investments considering their market dominance and continued expansion, MCFE appears to be a better buy based on the factors discussed here.

Even though NLOK delivered accelerated top-line growth in the last reported quarter, we think its lower profitability and premium valuation make it a riskier investment option compared to MCFE. Our research shows that the odds of success increase if you bet on stocks with an Overall POWR Rating of Buy or Strong Buy. 

If you’re looking for other top-rated stocks in the Software – Security industry, click here.

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MCFE shares were trading at $19.10 per share on Tuesday morning, down $0.37 (-1.90%). Year-to-date, MCFE has gained 14.44%, versus a 3.08% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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