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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers