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2 Cybersecurity Stocks to Buy in June

By Harsh Chauhan – Jun 7, 2020 at 11:21AM

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These two cybersecurity companies are benefiting from the side effects of the pandemic.

Cybersecurity stocks got hammered earlier this year as the novel coronavirus pandemic and other macroeconomic factors sent the broad market packing.

In March, the market saw its worst day since 2008, and top cybersecurity companies such as Palo Alto Networks (PANW 2.71%) and Check Point Software Technologies (CHKP 2.50%) bore the brunt. But conditions have changed, and both stocks have since regained a lot of ground in the past three months.

PANW Chart

Data by YCharts.

This isn't surprising as cybersecurity companies are rising to the challenge to address the fallout from the COVID-19 outbreak. As organizations shift their employees to a work-from-home model, there has been an increase in the volume of cybersecurity threats. The Federal Bureau of Investigation reports that cyberattacks have quadrupled in the wake of the pandemic, creating a tailwind for cybersecurity companies such as Palo Alto and Check Point.

Person pressing the Buy button on a keyboard

Image source: Getty Images.

Palo Alto has regained its mojo

Palo Alto Networks got off to an ominous start in 2020. The company's fiscal second-quarter report was disappointing as its sales growth lost momentum, and management slashed full-year guidance. But the pandemic seems to have given Palo Alto's business a bump as its growth hit a higher gear in the fiscal third quarter that ended on April 30.

The cybersecurity specialist saw a 20% spike in revenue to $869 million during the quarter, blowing past its guidance range of $835 million to $850 million. The good part is management believes that its COVID19-related strength is here to stay. That's evident from a 24% annual jump in billings to $1.0 billion as well as a 28% spike in deferred revenue to $3.4 billion, both of which outpaced the growth in actual revenue.

This is a positive sign for shareholders, as billings and deferred revenue are indicators of future revenue growth. Deferred revenue, for example, is the money collected by a company in advance of services that will be provided in the future. That amount sits on the balance sheet as a liability and is recorded on the income statement as revenue when the actual service delivery takes place.

Given the way the metric is trending, Palo Alto is witnessing an increase in its customer base as well as a jump in spending from existing customers. The company added 2,500 new customers last quarter, as pointed out on the latest earnings call, while there was a 21% annual increase in the lifetime value of the top 25 customers.

Not surprisingly, Palo Alto's remote access cybersecurity solution -- GlobalProtect -- saw a massive spike in demand as organizations adopted a telecommuting model. GlobalProtect added 1,000 new customers last quarter as the service allows organizations to enable secure access for all of their employees regardless of the device they use.

Looking ahead, secure remote access solutions will continue witnessing strong demand. According to a third-party report, demand for cloud virtual private networks (VPNs) that allow users to securely log into their organization's network is expected to produce a compound annual growth rate of 21% through 2026 -- setting the stage for further growth at Palo Alto.

Check Point is enjoying similar tailwinds

Like Palo Alto, Check Point Software also enjoyed a nice bump in its business last quarter. Demand for the company's remote security solutions and network security gateways similarly improved. CEO Gil Shwed provided a few instances of this shift on the latest earnings call:

We helped [a] major global corporation expand employee remote access from 8,000 daily users to 80,000 users. In another case, it was 130,000 users that are now utilizing our VPN solution. We have many more examples like these across all industries: financial services, transportation, industrial, healthcare, and others.

However, Check Point differs from Palo Alto in terms of the pace of its growth. The company's first-quarter revenue had increased just 3% year over year to $486.5 million. Deferred revenue also increased by a similar margin. This makes it clear that Check Point is no match for Palo Alto from a growth perspective, but investing in this cybersecurity play has its own set of advantages.

Palo Alto's GAAP net loss during the fiscal third quarter increased to $74.8 million from $20.2 million in the prior-year period. On the other hand, Check Point reported net income of $179 million that was flat compared to the prior-year period. This isn't surprising as Check Point enjoys much better margins.

PANW Gross Profit Margin Chart

Data by YCharts.

The huge difference in profitability between the two companies can be attributed to the difference in their approaches. While Palo Alto spends freely on acquisitions, Check Point has been a more conservative operation.

But that shouldn't count against Check Point Software as the company's transition to a subscription-based business model is gathering momentum. The company generated nearly $159 million in revenue from security subscriptions last quarter, an increase of 10% year over year. Revenue from software updates and maintenance also increased slightly to $217.5 million.

The legacy products and licenses business declined 2% year over year to $110.2 million, accounting for 22.6% of total revenue last quarter, compared to 23.9% a year ago. The transition could gain further momentum in the coming quarters as Check Point is now witnessing a faster transition to cloud-enabled solutions.

Which one should you choose?

For investors with a higher appetite for risk, Palo Alto Networks should be a better fit. The company is growing at a faster pace and is going all out to make a dent in the cybersecurity space with the help of its aggressive acquisition strategy, which is also the reason why it has a rich valuation.

Palo Alto stock trades at 43 times forward earnings estimates as of this writing, much higher than Check Point's forward earnings multiple of 17. The latter is a strong candidate for value investors looking for exposure to emerging trends in cybersecurity and technology at a lower cost.

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

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Stocks Mentioned

Check Point Software Technologies Ltd. Stock Quote
Check Point Software Technologies Ltd.
$114.82 (2.50%) $2.80
Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
$168.23 (2.71%) $4.44

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