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Palo Alto Networks vs. FireEye: Which Is the Better Turnaround Play?

By Harsh Chauhan – Jul 11, 2017 at 4:06PM

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Investors should choose carefully between these two cybersecurity stocks.

Cybersecurity specialists Palo Alto Networks (PANW 1.57%) and FireEye (MNDT) got off to a disastrous start in 2017. At FireEye, weak financial performance and executive turnover dinged investor confidence. Palo Alto Networks, on the other hand, struggled with an overcomplicated sales model.

The good news is that both companies' shares have started making a comeback thanks to better-than-expected quarterly results.

FEYE Chart

FEYE data by YCharts.

Both Palo Alto and FireEye are intently working on their shortcomings; which could turn out to be a better bet from an investing standpoint? Let's take a look.

The case for FireEye

FireEye's first-quarter results and the accompanying guidance turned out to be better than expected. Investors cheered the company's performance and its stock has been soaring ever since. But the more important thing to note is that the cybersecurity specialist has been aggressively cutting down on expenses, which is pushing it closer toward profitability.

Anonymous hacker sitting at a laptop, wearing a hoodie

Image source: Getty Images.

Last quarter, FireEye managed to lower its total operating expenses by 29%. The company achieved this massive reduction by lowering its sales and marketing expenses to just 55% of sales as compared to 73% of sales in the prior-year period. As a result, the company's non-GAAP net loss fell from $0.47 per share in the year-ago quarter to $0.09.

Looking ahead, FireEye's net loss should continue falling thanks to the greater adoption of its subscription business. The company's subscription revenue increased close to 12% last quarter, but related costs actually declined almost 5%. Therefore FireEye is now spending less money to acquire more customers, and it should be able to sustain this momentum thanks to its updated product platform.

The company recently released a new cloud and virtual end-point security offering that's aimed at helping customers improve the security of their cloud platforms at a lower cost. More importantly, FireEye has equipped the new platform with intelligence-based ransomware protection. This should boost the product's adoption, as the ransomware protection market is forecast to grow at 16% a year until 2021, according to Markets and Markets, hitting $17 billion.

FireEye investors can expect the company to keep cutting its losses at an impressive pace thanks to the improving traction of its subscription business.

The case for Palo Alto Networks

Just like FireEye, Palo Alto Networks is focused on growing its subscription business, which now accounts for 60% of total revenue in its most recent quarter, compared to 51% in the year-ago quarter. The cybersecurity specialist's subscription business is being boosted by rapid customer growth and a jump in business from each customer.

Not surprisingly, Palo Alto's net loss dropped almost 5% year over year during the fiscal third quarter. More importantly, the company's impressive customer growth led to a massive bump in its top line, which grew 25% year over year. The good news for investors is that Palo Alto's top-line growth is set to continue, as it expects a 20%-23% revenue jump in the ongoing quarter, while FireEye's top line is expected to remain stagnant year over year.

Looking ahead, the company's subscription business should only improve, as it is trying to tap the fast-growing cloud security market with its latest product updates. Palo Alto recently released a cloud-based security framework that will allow customers to use security applications from different cloud service providers.

This will help Palo Alto eliminate deployment costs since it is offering the new framework on a software-as-a-service model, so users can activate the service at any location without incurring significant start-up costs. As a result, Palo Alto can now jump into the fast-growing cloud security market, which could be worth $12.7 billion in 2022, according to Markets and Markets.

The verdict

Both Palo Alto Networks and FireEye have recovered impressively, but the former is growing at a faster pace. Palo Alto's subscription business still has a lot of room to grow as compared to FireEye's, so it carries a greater potential of reducing its sales and marketing expenses. Palo Alto's margins are currently in better condition than FireEye's, so it can move more quickly toward profitability as the subscription business gains steam.

FEYE Profit Margin (TTM) Chart

FEYE Profit Margin (TTM) data by YCharts.

What's more, Palo Alto is better placed to fund its growth thanks to a superior cash position and lower debt, which makes it a better bet for investors looking to take advantage of cybersecurity growth.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends FireEye and Palo Alto Networks. The Motley Fool has a disclosure policy.

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