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The 3 Best Network Security Stocks to Buy in 2017

By Anders Bylund – May 23, 2017 at 1:52PM

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These three network security experts look like great investments right now. Which one is the best fit for your investing style?

Plenty of fortunes have been made or lost in the network security sector. As the concept of networked data digs deeper and deeper into our everyday lives, the need to keep those crucial data flows intact and safe rises exponentially.

So how can investors strike gold in the network security market? Here are three of the industry's best buys right now. Read on to see what sets Extreme Networks (EXTR 2.50%), Palo Alto Networks (PANW -1.74%), and Check Point Software Technologies (CHKP -0.38%) at the head of the table.

Network security concept, with a padlock around one special Ethernet cable.

Image source: Getty Images.

A wonderful company at a fair price

Check Point's is focusing its business on three types of network security: Mobility, cloud security, and proactive threat prevention. Taken together, the company's management envisions a complete one-stop security solution for modern enterprises. Many companies supply one or two of these network security components, but the full trifecta is a big selling point.

Good things are happening on the strictly financial side of Check Point's business, too. The company is in the process of moving over from traditional software license sales to multi-year subscription contracts, paving the way for stronger customer loyalty and more predictable revenue growth.

The stock trades at a somewhat inflated 25 times trailing earnings and 19 times free cash flows, but Check Point investors can also look back at at several years of steady growth on both the top and bottom lines.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," says legendary investor Warren Buffett. Check Point looks like a winner in that light.

CHKP Chart

CHKP data by YCharts

This turnaround story is starting with 26% annual sales growth

If Check Point is a safe bet in a hot market, Palo Alto Networks is kind of a turnaround story in a slightly smaller security niche.

Palo Alto was built from the ground up to provide data security in the cloud. Started by former Check Point engineer Nir Zuk, the company always aimed to give its clients control of their security firewalls in a very detailed security model.

Investors enjoyed market-crushing returns in 2014 and 2015. Sales doubled and share prices tripled over that span, while cash flows nearly quadrupled.

PANW Chart

PANW data by YCharts

But the stock has been pummeled since the start of 2016, as the raucous rate of top-line growth started showing signs of a slowdown. The resulting stock chart is not exactly pretty:

PANW Chart

PANW data by YCharts

Palo Alto is still growing sales and earnings at a hefty clip, often replacing far larger rivals at the negotiating table with enterprise clients. Even after these drastic cuts, the stock still trades at lofty multiples to any fundamental metric you pick. Investing here requires a strong dose of risk tolerance. That being said, Palo Alto shares could skyrocket again as soon as the company gets back on the old hyper-growth path.

And the thing is, Palo Alto really hasn't stopped its disproportionate growth in the first place. This turnaround sure is starting from a shallow trough.

Long-range networking with a flexible security framework

Extreme Networks takes a different view of the networking market, doubling down on high-speed connections over long geographical distances. Though Extreme's solutions include switching hardware, each product is a high-powered software package wrapped in the necessary bits of networking hardware.

The company's software-driven networking tools are a perfect match for cloud computing environments, and the software focus also allows Extreme and its clients to update and retool their network switches as new threats and challenges emerge. That's why Extreme Network is seen as a leader in the network security space, ready to revamp its networking tools as the threat picture evolves.

The pending acquisition of data-center operations from Broadcom (AVGO -1.34%) division Brocade Communications Systems won't change Extreme's software focus, but it will increase the company's market reach.

At this point, Extreme Networks shares have soared 160% higher in 52 weeks -- and still trade at a very affordable 16 times forward earnings. It's hard to beat this combination of value, momentum, and operating history. 

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Broadcom and Palo Alto Networks. The Motley Fool has a disclosure policy.

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