Ignore Palo Alto Networks Inc: Here Are 3 Better Stocks

The data security provider may be an analyst darling, but there are better alternatives from which to choose.

Tim Brugger
Tim Brugger
Jun 16, 2017 at 7:05PM
Technology and Telecom

The year got off to a bumpy start for Palo Alto Networks (NYSE:PANW) shareholders after the sky-high quarterly revenue gains investors had come to expect began spiraling downward. But that all changed following Palo Alto's first-quarter earnings announcement.

The $431.8 million in sales, up 25%, Palo Alto reported last quarter was higher than the company's own guidance and pundit's estimates, driving its stock price up 17% overnight. But with ongoing losses and rampant spending the norm, it could be argued that Palo Alto is overvalued after its run-up. The good news is there are several alternatives, each in unique positions, that offer less risk than Palo Alto with a world of upside.

Digital picture of a hologram key inside various data points.

Image source: Getty Images.

Contestant No. 1

Similar to Palo Alto, Fortinet (NASDAQ:FTNT) was another big-spending high-flyer relying more on top-line growth to push up its stock price instead of focusing on growing profits -- until recently. Last quarter was a watershed moment for Fortinet following a better-than-expected 20% jump in revenue to $340.6 million.

The sales growth was actually down from previous quarters, when 30%-plus improvements were the norm. The difference with Fortinet's most recent period is spending. While still a work in progress, the company's expenses aren't increasing as rapidly as in the past.

The result was a six-fold improvement in Fortinet's per-share profit to $0.06 compared with $0.01 a share last year. But the real arrow in Fortinet's quiver was its 28% gain in service revenue to $205.3 million. Building a reliable, and relatively predictable, source of revenue will help keep Fortinet's positive momentum going for years to come.

The next contestant is...

The security stock with better prospects than Palo Alto going forward may come as a surprise to some: FireEye (NASDAQ:FEYE). After reporting a meager 3% year-over-year increase in revenue of $173.7 million, FireEye's stock has risen 24%, making us ask, why? The answer is the primary reason FireEye is a better long-term option than Palo Alto.

When Kevin Mandia took over the CEO chair duties last year, FireEye was in disarray. Losses were mounting, and serious changes were needed. Last quarter, investors saw the result of those changes. Paring costs -- including workforce reductions -- improving efficiencies, and shifting to a cloud software subscription focus topped Mandia's to-do list.

Operating expenses decreased by an impressive 29% in the first quarter, which helped cut FireEye's per-share losses by more than half, to $0.48 from last year's $0.98 a share. Excluding one-time items, earnings-per-share (EPS) losses went from $0.47 a year ago to just $0.09 a share. Mandia's subscription emphasis is also paying off, jumping 12% to $150 million, equal to an eye-catching 86% of total revenue.

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Last but certainly not least

A common theme among all of the stocks above, including the last stock that's better than Palo Alto, Check Point Software (NASDAQ:CHKP), is the transition to software subscription sales in the cloud and the recurring revenue it brings. The difference with Check Point is that CEO Gil Shwed got onboard well ahead of the others, and it shows.

Last quarter, revenue grew 8% to $435.5 million, above consensus expectations. But the reason Check Point stock is up 30% year to date, and is generally less volatile than Palo Alto, is the steady rise in subscription revenue. Total sales may not have impressed some investors, but the stellar 27% gain from the subscription unit to $112 million sure did. And it gets better.

Toss in Check Point's $197 million in software updates and servicing sales, and an astonishing 71% of total revenue is recurring. The lower costs associated with subscriptions and servicing were again on display last quarter. Earnings climbed 14% to $1.08 a share compared to $0.97 a year ago, which has been an on-going theme for Check Point. Slow but steady revenue growth, combined with nearly twice the bottom-line EPS improvements, make Check Point the better buy.