Palo Alto Networks, Inc. (PANW) and Check Point Software Technologies Ltd. (CHKP) are two prominent players in the cybersecurity space. PANW in Santa Clara, Calif., offers a security platform that allows enterprises, service providers, and government entities to continuously secure all users, applications, data, networks, and devices with comprehensive visibility and context across all locations. It sells its products and services through its channel partners, directly to medium to large enterprises, service providers, and government entities operating in various industries. In comparison, San Carlos, Calif.-based CHKP develops, markets, and supports a range of software and hardware products and services for IT security worldwide. The company offers a portfolio of network security, data and endpoint security, and management solutions and sells them through distributors, system integrators, OEMs, and managed security service providers.
With rapid digitalization happening across industries since the onset of the COVID-19 pandemic, and growing cloud migration to facilitate hybrid working, the demand for cybersecurity solutions to protect sensitive information from cyberattacks and large-scale data breaches has increased. Rising investments by enterprises and governments to protect their data should drive the cybersecurity industry’s growth.
Investors’ interest in this space is evidenced by the Global X Cybersecurity ETF’s (BUG) 12.6% gains versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns over the past month. The global cybersecurity market is expected to grow at a 13.4% CAGR to $346 billion by 2027. Therefore, both PANW and CHKP should benefit. But while CHKP has gained 31.3% in price over the past three months, PANW has surged 11.4%. CHKP is a clear winner with 24.3% gains versus PANW’s 6.7% returns year-to-date. But which of these stocks is a better pick now? Let’s find out.
On Feb. 28, 2022, PANW introduced innovations for Prisma SASE, which includes a hierarchical multi-tenant cloud management portal and open API framework, specifically designed for Managed service providers (MSPs) to deliver secure access service edge (SASE) services cost-effectively at scale. The offering should allow PANW to generate higher customer demand in the coming months.
Also last month, CHKP announced the acquisition of Spectral, an Israeli startup and key innovator in developer-first security tools. With this acquisition, CHKP will extend its Check Point CloudGuard cloud solution with a developer-first security platform and provide the widest range of cloud application security use cases, including Infrastructure as Code (IaC) scanning and hardcoded secrets detection. CHKP should witness high demand in the coming months.
Recent Financial Results
PANW’s total revenues for its fiscal year 2022 second quarter, ended Jan.31, 2022, increased 29.5% year-over-year to $1.32 billion. The company’s total gross profit came in at $911.60 million, up 28.5% from its year-ago period. Its operating loss was $73.90 million for the quarter, representing a 16.8% decline from the prior-year period. While its non-GAAP net income increased 20% year-over-year to $185 million, its non-GAAP EPS increased 12.3% to $1.74. As of Jan. 31, 2022, the company had $1.92 billion in cash and cash equivalents.
For its fiscal 2021 fourth quarter, ended Dec. 31, 2021, CHKP’s total revenues increased 6.3% year-over-year to $599.10 million. The company’s non-GAAP operating income came in at $284.50 million, representing a marginal decline from the prior-year period. CHKP’s non-GAAP net income was $294 million, representing a 2.3% year-over-year decline. Its non-GAAP EPS increased 3.7% year-over-year at $2.25. The company had $271.90 million in cash and cash equivalents as of Dec. 31, 2021.
Past and Expected Financial Performance
PANW’s revenue and total assets have increased at CAGRs of 23.3% and 22.1%, respectively, over the past three years. The company’s levered free cash flow has increased at a 19.2% CAGR over the past three years.
PANW’s EPS is expected to grow 18.7% year-over-year in its fiscal 2022, ending July 31, 2022, and 24% in fiscal 2023. Its revenue is expected to grow 28.2% year-over-year in fiscal 2022 and 22.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 24.4% rate per annum over the next five years.
In comparison, CHKP’s revenue and total assets have increased at CAGRs of 4.2% and 0.4%, respectively, over the past three years. The company’s levered free cash flow has grown at a 2.2% CAGR over the past three years.
Analysts expect CHKP’s EPS to rise 3.1% year-over-year in its fiscal year 2022, ending Dec.31, 2022, and 10.1% in fiscal 2023. Its revenue is expected to increase 5.7% year-over-year in fiscal 2022 and 5% in fiscal 2023. And the company’s EPS is expected to grow at a 7.7% rate per annum over the next five years.
In terms of forward EV/Sales, PANW is currently trading at 10.39x, which is 59.4% higher than CHKP’s 6.52x. And in terms of forward EV/EBITDA, CHKP’s 14.35x compares with PANW’s 44.98x.
PANW’s trailing-12-month revenue is almost 2.2 times CHKP’s. However, CHKP is more profitable, with a 42.9% EBITDA margin versus PANW’s negative value.
Furthermore, CHKP’s ROE, ROA, and ROTC are 24.3%, 9.7%, and 16.7% versus PANW’s respective negative values.
While CHKP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, PANW has an overall C grade, which equates to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
CHKP has an A grade for Quality, which is consistent with its higher-than-industry profitability ratios. CHKP’s 88.5% trailing-12-month gross profit margin is 78.6% higher than the 49.5% industry average. And PANW’s B grade for Quality is in sync with its relatively lower profit margins. PANW has a 69.6% trailing-12-month gross profit margin, which is 40.5% higher than the 49.5% industry average.
CHKP has a C grade for Value, which reflects its slightly higher-than-industry valuations. CHKP has a 14.35x forward EV/EBITDA, which is 2.8% higher than the 13.95x industry average. And PANW’s D grade for Value reflects its overvaluation. PANW’s 44.98x forward EV/EBITDA is 222.4% higher than the 13.95x industry average.
Among the 29 stocks in the Software – Security industry, CHKP is ranked #5, while PANW is ranked #10.
Beyond what we have stated above, our POWR Ratings system has also rated CHKP and PANW for Stability, Sentiment, Growth, and Momentum. Get all CHKP ratings here. Also, click here to see the additional POWR Ratings for PANW.
Both CHKP and PANW are well-positioned to capitalize on increased IT security spending and heightened demand for cybersecurity solutions amid rising ransomware attacks and large-scale attacks on cloud platforms. However, we think its relatively lower valuation and higher profitability make CHKP a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software – Security industry.
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PANW shares were trading at $593.78 per share on Tuesday morning, down $0.47 (-0.08%). Year-to-date, PANW has gained 6.65%, versus a -8.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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