Do Proofpoint’s Earnings Mean Anything for Cybersecurity?

Proofpoint had strong earnings, but before you buy any cybersecurity stocks, there are other things that must be considered to find value.

May 5, 2014 at 8:30PM

Proofpoint (NASDAQ:PFPT) shares soared after the cloud data protection software provider reported better-than-expected earnings. However, it's worth noting that shares of security stocks have been badly beaten, and had continued to trend lower prior to Proofpoint's report. So, should you buy Proofpoint or peers Palo Alto Networks (NYSE:PANW) and FireEye (NASDAQ:FEYE)?

What did Proofpoint say?
Proofpoint saw gains of nearly 14% following its first-quarter report. The company saw revenue of $42.7 million, beating expectations with growth of 38.8% year-over-year. Moreover, its loss per share of $0.12 was also better than the consensus.

Lastly, the company's guidance was solid, expecting full-year revenue of $179 million and a loss of $0.43 per share, both of which were slightly better than expectations. Essentially, the company beat on all metrics, although the beats were marginal compared to expectations.

High expectations and great volatility
As it appears, Proofpoint's earnings eased some fears that security providers are facing increased competition from larger companies that are building their own security networks. Specifically, Proofpoint's Targeted Attack Protection program, which protects customers against malicious links and emails, saw year-over-year growth of more than 100%. It is this performance that has investors of other cybersecurity stocks excited.

Nonetheless, all security-related companies sell different types of software, including FireEye and Palo Alto. For example, FireEye sells appliances to prevent advanced persistent threats, or APTs, alerting customers, but not actually preventing or eliminating the threat. Palo Alto, on the other hand, operates in the advanced firewall space, combining other services such as intrusion prevention.

With that said, investors know that companies of all sizes have bulked up their security, and as a result, shares of security-related stocks have soared in years past. In the five months prior to March, Palo Alto soared more than 65%, Proofpoint increased 225% in the year prior to March, and FireEye, with its IPO late last year, appreciated by 150% in the initial five months following its debut.

As a whole, this is an industry that has had enormous expectations built in to valuations, and even with large losses since March, these stocks are still expensive. So, are Proofpoint, FireEye, or Palo Alto good buys?

Is there a buying opportunity?
According to Proofpoint's guidance, the stock trades at 6 times guided full-year revenue, with operating margins of negative 20%. FireEye is growing a lot faster, with 152% expected revenue growth this year, in part thanks to an acquisition, and 46% growth is expected in 2015. However, FireEye trades at 9.5 times 2015's expected sales, and has a negative 100% operating margin, meaning $2 is spent for every $1 in earned operating income. Therefore, FireEye is still a big risk.

However, Palo Alto might be a different story. It trades at 10 times trailing 12 month sales, but the company is expected to grow 45% and 34%, respectively, over the next two years. Moreover, the company should be profitable in the process.

In 2012, Palo Alto had seen four consecutive years of operating margin improvements, including profits in 2012, but then took a step back in 2013. However, Palo Alto is expected to earn $0.38 and $0.60 per share during the next two years, respectively, to complement its impressive growth rate. Lastly, the company's upside looks solid beyond 2015, as Palo Alto estimates that its total addressable market will rise from $15.8 billion to $19.5 billion over the next three years, and will continue to grow.

Final thoughts
If you want to invest in the cybersecurity space, you're going to pay for it. But, in the process, it's important to remember that you're not comparing apples to apples, as these companies all offer different services and are priced differently in the market.

With that said, there are dozens of cybersecurity-related companies, and while different, investors can still compare valuations and growth rates to find a good opportunity. In this particular case, Palo Alto operates in a large market, it's attractively priced, profitable, and has a good risk-to-reward ratio, meaning it appears to be the best.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Palo Alto Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information