Over the past year, the cybersecurity space gained immense traction due to the increasing cyber-attacks with the rapid digitization of operations, adoption of cloud solutions, and proliferation of smart devices.
According to Statista, cybercrime costs are expected to surpass $11 trillion in 2023. Meanwhile, the cybersecurity market’s revenues are projected to reach $173.50 billion in 2023.
As companies look to defend themselves against a rapidly evolving cyber threat, investing in fundamentally sound security stocks Check Point Software Technologies Ltd. (CHKP) and Radware Ltd. (RDWR) could be wise. On the contrary, SentinelOne, Inc. (S) might be best avoided considering its weak fundamentals.
The ongoing transition of organizations toward a digital-first workplace post-pandemic has resulted in increased adoption of cloud applications for scalability, cost-effectiveness, and convenience. As a result, companies have become increasingly vulnerable to cyberattacks, necessitating the need to protect their data and systems.
Earlier this year, Check Point Software Technologies Ltd. (CHKP) reported that cyberattacks against cloud-based networks rose 48% year-over-year in 2022. As cloud adoption increases, it will become a more lucrative target for cybercriminals looking for increasingly sophisticated ways to infiltrate company systems. Adding to the worse, Cybersecurity Ventures stated that global cybercrime costs will grow 15% year-over-year, reaching $10.5 trillion by 2025.
Propelled by the surging need for security solutions, the global cybersecurity market is projected to grow from $172.32 billion in 2023 to $424.97 billion by 2030, exhibiting a CAGR of 13.8%.
To that end, investors could lay their hands on fundamentally sound security stocks CHKP and RDWR to capitalize on the industry’s tailwinds. On the other hand, given the weak fundamentals and bleak growth prospects, S could be best avoided.
Let’s take a closer look at the fundamentals of these stocks.
Stocks to Buy
Check Point Software Technologies Ltd. (CHKP)
Headquartered in Tel Aviv, Israel, CHKP develops, markets, and supports a range of products and services for IT security worldwide. It offers network security, endpoint security, data security, and management solutions to enterprises, service providers, Small and Medium-Sized Businesses (SMBs), and consumers.
On June 23, CHKP announced a partnership with the communications technology company, TELUS, to launch the TELUS Cloud Security Posture Management (CSPM) service in Canada. By leveraging CHKP’s AI-powered threat prevention and high-fidelity posture management technology, the new managed solution for organizations enables easy real-time monitoring of cloud security posture and detects, remediates, and reports on vulnerabilities. Such capability is expected to attract robust demand and boost revenues.
In the same month, the company collaborated with Everphone to advance threat prevention for corporate smartphones. The integration of Check Point Harmony Mobile’s robust protection with Everphone's Device-as-a-Service (DaaS) Solution offers comprehensive protection to organizations against a wide range of cyber threats.
With the rapidly growing cyber threat landscape, this move is expected to extend CHKP’s visibility in a critical emerging category of smartphone security and stay competitive in the market.
In terms of forward non-GAAP P/E, CHKP is trading at 15.92x, 31.6% lower than the industry average of 23.27x. Likewise, its forward EV/EBITDA and EV/EBIT multiples of 10.97 and 11.26 are 24.2% and 38.8% lower than the industry averages of 14.48x and 18.41x, respectively.
Also, the stock’s trailing-12-month ROCE and ROTA of 26.97% and 14.64% are significantly higher than the industry averages of 0.50% and 0.02%, respectively. Also, its net income margin of 34.49% compares to the industry average of 1.71%.
During the fiscal first quarter (ended March 31, 2023), CHKP’s total revenues increased 4.3% year-over-year to $566.20 million. The company’s non-GAAP operating income amounted to $238.40 million, while its non-GAAP net income increased 7% year-over-year to $217.90 million. Also, its non-GAAP EPS came in at $1.80, representing a 14.6% year-over-year improvement.
The consensus EPS estimate of $1.90 for the fiscal second quarter (ending June 30, 2023) represents a 15.5% improvement year-over-year. The consensus revenue estimate of $589.51 million for the current quarter indicates a 3.2% increase from the same period in the prior year. The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past nine months, the stock has gained 13.3% to close the last trading session at $127.94.
CHKP’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
It has an A grade for Quality. Among the 21 stocks in the Software - Security industry, it is ranked #3.
Beyond what we stated above, we also have CHKP’s ratings for Growth, Value, Momentum, Stability, and Sentiment. Get all CHKP ratings here.
Radware Ltd. (RDWR)
RDWR is a leading provider of cyber security and application delivery solutions for applications in the cloud, on-premise, and software-defined data centers. Its solutions incorporate Distributed Denial of Service protection, Web application firewall (WAF), and Application Delivery Controllers (ADC) technologies to enable its customers to provide cyber-attack mitigation solutions for various applications.
On June 22, RDWR announced a Signature partnership with Sycomp and closed a million-dollar deal to provide hybrid DDoS protection with one of the top ten biotech companies in the U.S. Sycomp A Technology Company, Inc., which is a global provider of an innovative data center, cloud, endpoint, and security services and solutions.
Commenting on this, Yoav Gazelle, RDWR’s chief business officer, said, “The Signature Partnership is a strong endorsement of the expertise and capabilities that Sycomp brings to the table. Our joint customers will benefit from the combined strengths of Sycomp's deep industry knowledge and Radware's state-of-the-art network and application protection and delivery solutions.”
In terms of forward EV/Sales, RDWR is trading at 1.84x, 37.8% lower than the industry average of 2.95x. In addition, its forward Price/Book ratio of 2.48 is 41% lower than the industry average of 4.21.
In the fiscal first quarter that ended on March 31, 2023, RDWR’s revenues amounted to $55.74 million, while its non-GAAP operating income stood at $4.42 million. During the same period, its non-GAAP net income and non-GAAP EPS came in at $6.08 million and $0.14, respectively. Also, its total current assets amounted to $362.02 million, representing an 8.3% increase compared to $334.42 million for the period ended December 31, 2022.
Its attributable net income amounted to ¥6.37 billion ($45.92 million) and ¥45.82 per share, respectively. During the same period, its total current liabilities came in at ¥231.08 billion ($1.66 billion) compared to ¥232.29 billion ($1.67 billion) for the period that ended December 31, 2022.
Street expects RDWR’s EPS for the third quarter (ending September 2023) to increase by 21.2% year-over-year to $0.18. Its revenue for the next quarter is expected to be $71.95 million, indicating a 2% year-over-year growth.
RDWR’s trailing-12-month levered FCF and gross profit margins of 24.06% and 81.21% are 244.7% and 66.3% higher than the industry averages of 6.98% and 48.83%, respectively. Also, its CAPEX/Sales of 2.92% compares to the industry average of 2.30%.
Shares of RDWR rose marginally over the past month to close the last trading session at $19.60.
RDWR’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. It also has a B grade for Stability and Quality. Within the same industry, it is ranked #4.
To see the other ratings of RDWR for Growth, Value, Momentum, and Sentiment, click here.
Stock to Avoid
SentinelOne, Inc. (S)
S is a cybersecurity provider that delivers an artificial intelligence-powered platform to enable autonomous cybersecurity defense. The company’s Singularity platform ingests, correlates, and queries petabytes of structured and unstructured data from a myriad of ever-expanding disparate external and internal sources in real-time.
In terms of forward EV/Sales, S is trading at 6.13x, 107.5% higher than the industry average of 2.95x. Likewise, its forward Price/Sales multiple of 7.29 is 155.4% higher than the industry average of 2.86x.
Also, the stock’s trailing- 12-month net income margin, ROCE, and ROTA of negative 82.90%, 24.62%, and 17.88% compared to the industry averages of 1.71%, 0.50%, and 0.02%, respectively.
For the first quarter that ended April 30, 2023, S’ total operating expenses increased 45.8% year-over-year to $206.19 million, while its loss from operations widened 27.8% from the prior-year quarter to $115.38 million. The company’s net loss amounted to $106.87 million and $0.37 per share, widening 18.9% and 12.1% year-over-year in the same period.
Analysts expect S’ EPS for the fiscal years 2024 and 2025 to remain negative. The stock has slumped 42.9% over the past nine months and 28% over the past month to close the last trading session at $14.86.
S’ weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Stability and a D for Value, Sentiment, and Quality. It is ranked last out of 21 stocks in the same industry. Click here to see the additional ratings for S (Growth and Momentum).
What To Do Next?
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CHKP shares were trading at $126.36 per share on Friday afternoon, down $1.58 (-1.23%). Year-to-date, CHKP has gained 0.16%, versus a 16.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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