Increased exposure to large-scale data breaches and ransomware attacks upon rapid digitization of operations and growing adoption of cloud computing in hybrid working has led to many companies increasing their spending on their cybersecurity, allowing cybersecurity companies to benefit. Moreover, rising corporate and government investments in cybersecurity because of growing concerns over cyberattacks from Russia due to escalating sanctions on the nation should benefit the cybersecurity industry.
Investors’ interest in this space is evident from the Global X Cybersecurity ETF’s (BUG) 10.7% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The global cybersecurity market is expected to grow at a 12% CAGR to $500.70 billion by 2030.
Check Point Software Technologies Ltd. (CHKP) and Fortinet, Inc. (FTNT) are two prominent players in the cybersecurity space. CHKP develops, markets, and supports a range of software and hardware products and services for IT security worldwide. It offers a portfolio of network security, data and endpoint security, and management solutions and sells them through distributors, system integrators, OEMs, and managed security service providers. FTNT provides broad, integrated, and automated cybersecurity solutions and offers security subscriptions, technical support, and professional and training services worldwide. It serves channel partners and customers in telecommunications, technology, financial services, education, retail, manufacturing, and healthcare.
CHKP has rallied 19.73% in the past year and FTNT has rallied 68.67% in the same time period. Which of these stocks is a better pick now? Let’s find out.
Click here to checkout our Cybersecurity Industry Report for 2022
Latest Developments
On April 7, 2022, CHKP announced plans to host control room facilities and cyber security services from its Rakia Mission Center at CHKP’s headquarters in Tel Aviv to support the Rakia Israeli space mission to the International Space Station (ISS), which is set to last 8 to 10 days. The Center will include a control room from which scientists, artists, and educators can monitor the activities of Israeli astronaut Eytan Stibbe and enable them to make necessary changes to experiments in real-time while conducting a direct dialogue with the control room of the ISS in the United States. This will allow CHKP to gain wider recognition across the industry.
On March 16, 2022, five new service providers – Etihad Atheeb Telecom Company “GO,” Microland, Radius Telecoms, Inc., Spectrotel, and TIME dotCom – have added FTNT’s Fortinet Secure SD-WAN to their managed service portfolios. FTNT’s industry-leading Secure SD-WAN solution and integration with the Fortinet Security Fabric supports MSSPs in delivering a simplified network architecture with accelerated security to achieve operational efficiencies from the datacenter to multi-cloud environments to SaaS locations. As enterprise attack surface is growing, given the continued digitization of various businesses' adoption of work-from-home structures, the offering of FTNT’s products should witness high demand in the coming months.
Recent Financial Results
CHKP’s total revenues for its fiscal 2021 fourth quarter ended December 31, 2021, increased 6.3% year-over-year to $599.10 million. The company’s non-GAAP operating income came in at $284.50 million, representing a marginal decline from the prior-year period. Its non-GAAP net income was $294 million, representing a 2.3% year-over-year decline. CHKP’s non-GAAP EPS increased 3.7% year-over-year at $2.25. The company had $271.90 million in cash and cash equivalents as of December 31, 2021.
For its fiscal 2021 fourth quarter ended December 31, 2021, FTNT’s total revenues increased 28.8% year-over-year to $963.60 million. The company’s gross profit came in at $735.30 million, up 26.6% from the prior-year period. Its operating income came in at $274.70 million, indicating a 24.9% year-over-year improvement. While its net income increased 17.3% year-over-year to $205.80 million, its non-GAAP EPS grew 16% to $1.23. As of December 31, 2021, the company had $1.32 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, CHKP’s revenue, EPS, and levered free cash flow have increased at CAGRs of 4.2%, 5.7%, and 2.1%, respectively.
CHKP’s EPS is expected to increase 3.3% year-over-year in fiscal 2022, ending December 31, 2022, and 10.2% in fiscal 2023. Its revenue is expected to grow 5.7% in fiscal 2022 and 5.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 7.7% rate per annum over the next five years.
FTNT’s revenue, EPS, and levered free cash flow have increased at CAGRs of 22.8%, 23.7%, and 19.8%, respectively, over the past three years.
Analysts expect FTNT’s EPS to grow 24.3% year-over-year in fiscal 2022, ending December 31, 2022, and 20% in fiscal 2023. Its revenue is expected to grow 28.6% year-over-year in fiscal 2022 and 20.4% in fiscal 2023. Analysts expect the company’s EPS to grow at a 17.5% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, FTNT is currently trading at 3.40x, 3% higher than CHKP’s 3.30x. In terms of forward EV/Sales, CHKP’s 6.30x compares with FTNT’s 12.03x.
Profitability
CHKP’s trailing-12-month revenue is almost 1.5 times FTNT’s. However, CHKP is more profitable, with an 88.5% gross profit margin versus FTNT’s 76.6%.
Furthermore, CHKP’s EBITDA margin and net income margin of 42.9% and 37.6% compare with FTNT’s 21.9% and 18.2%, respectively.
POWR Ratings
While CHKP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, FTNT has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both CHKP and FTNT have an A grade for Quality, consistent with their higher-than-industry profitability ratios. CHKP’s trailing-12-month levered free cash flow of 37.6% is 268.2% higher than the industry average of 10.2%. FTNT has a 27.1% trailing-12-month levered free cash flow margin, 165.4% higher than the industry average of 10.2%.
CHKP has a C grade for Value, reflecting its slightly higher-than-industry valuation ratios. CHKP’s 13.86x forward EV/EBITDA is 11.4% higher than the 12.45x industry average. FTNT’s D grade for Value is in sync with its overvaluation. FTNT has a 43.34x forward EV/EBITDA, which is 248.2% higher than the 12.45x industry average.
Of the 31 stocks in the Software - Security industry, CHKP is ranked #4, while FTNT is ranked #9.
Beyond what we have stated above, our POWR Ratings system has also graded CHKP and FTNT for Sentiment, Stability, Momentum, and Growth. Get all CHKP ratings here. Also, click here to see the additional POWR Ratings for FTNT.
The Winner
Growing demand for cybersecurity solutions to protect data upon concerns over large-scale cyber attacks makes the industry’s prospects bright. Therefore, prominent players in this space, CHKP and FTNT should benefit. However, relatively lower valuation and higher profitability make CHKP a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Software – Security industry.
CHKP shares were unchanged in after-hours trading Wednesday. Year-to-date, CHKP has gained 23.04%, versus a -6.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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