The year has been good for many data security providers, including Palo Alto Networks (PANW -1.71%) and Check Point Software (CHKP -5.00%). After Palo Alto reported third-quarter results on May 31, its shares surged 17% on over six times its average trading volume the following day. After the run, Palo Alto stock is now up 13% this year.
Check Point has also enjoyed 2017, rising 36% so far, though the competitors continue to manage their businesses differently. Palo Alto's expenses didn't increase as much as in past quarters, but it still aggressively spends to fuel its top line. Check Point takes a more conservative approach to its business.
Image source: Palo Alto Networks.
The case for Palo Alto Networks
Excluding one-time items, the $0.61 a share Palo Alto reported last quarter beat pundits' estimates of $0.55, and its $431.8 in revenue was also above the $412.1 million expected and a 25% increase. But the good news didn't stop there for Palo Alto shareholders. The $481 million to $491 million expected this quarter was a pleasant surprise, as was per-share guidance of $0.78 to $0.80. Spending continues to outpace revenue growth, but the difference was less dramatic.
Cost of revenue rose 29% to 123.7 million, but operating expenses "only" increased 18% to $357.2 million. Palo Alto's spending has hampered its stock price for much of the past year as revenue growth waned, so reigning that in is a step in the right direction. That said, Palo Alto can't seem to remedy one problem area in particular: sales and marketing expenses.
The good news is the $226.9 million spent on sales and marketing last quarter was just 16% higher than a year ago. The not-so-good news is that Palo Alto is still spending over half of its total revenue in sales costs. But with top-line growth surprisingly strong, investors have clearly turned a blind eye.
Image source: Check Point Software.
The case for Check Point
Like other data security providers, Check Point is laser-focused on growing its software subscription sales, which in turn boosts recurring revenue. Last quarter's 8% jump in sales to $435 million beat expectations, as did Check Point's $1.08 per-share earnings, a 15% improvement year over year. The growth Check Point enjoyed last quarter was driven by a 27% jump in software subscription revenue to $112 million.
The recurring revenue foundation Check Point has been building for well over a year continues to make up a larger portion of sales with each passing quarter, and the benefits of its successful transition can be measured by its rising profitability.
Though Check Point's selling-related costs rose to $106.2 million, it still represents less than a quarter of total revenue. Compared to Palo Alto forking out 53% of its revenue to the sales and marketing folks, Check Point's overhead in that department is hardly a blip on the radar. Why? Because it's less costly to provide service and updates to existing customers than it is to over-rely on generating new business.
And the better buy is...
As Palo Alto stock recently demonstrated (again), it remains a darling of pundits and investors alike. Last quarter was a good one, to be sure, but it appears it will be next year or beyond before Palo Alto can boast even the slightest of profits. That said, for those who don't mind a higher degree of risk and won't panic with wild price swings, Palo Alto offers a lot of upside.
For the more fundamental investor who appreciates the notion of a relatively stable and reliable source of revenue quarter in and quarter out, Check Point software is the hands-down better buy. Because of Check Point's stable growth, its stock is not likely to jump 17% in a day, but rather consistently increase over time. Personally, I prefer fundamentally sound alternatives with predictable increases in profits, so Check Point gets the nod from me.
