Cloudflare, Inc. (NET) in San Francisco, and Check Point Software Technologies Ltd. (CHKP) in San Carlos, Calif., are two prominent players in the cybersecurity space. NET operates a cloud platform that delivers a range of network services to various industries and governments worldwide. The company provides businesses with a unified control plane to provide security, performance, and reliability across their on-premises, hybrid, cloud, and Software-as-a-Service (SaaS) applications. In comparison, CHKP develops, markets, and supports a range of software and hardware products and services for IT security worldwide. The company 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.
With widespread digitization, enterprises and governments have increased investments in cybersecurity solutions to protect themselves from rising cyberattacks and large-scale data breaches. The cybersecurity market is expected to grow at a 10.5% CAGR to $231.74 billion by 2025. So, both NET and CHKP should benefit.
But, while CHKP’s shares have declined by 1.4% in price over the past nine months, NET has surged 130.6%. NET is also a clear winner with 57.1% gains versus CHKP’s 2.6% returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let’s find out.
On October 18, 2021, NET announced that it would work with Microsoft Corporation (MSFT), Yandex N.V. (YNDX), and other leading search engines to provide the most timely and relevant search results to their customers. By participating in the IndexNow.org initiative, NET’s recently launched Crawler Hints will allow websites to automatically notify search engines whenever content is created, updated, or deleted so they can be more efficiently crawled, and improve site performance by reducing unnecessary bot traffic, which ultimately helps improve search rankings. On October 7, 2021, Proxeem, a hosting, IT project management, and web development service provider, selected CHKP’s Check Point CloudGuard AppSec with Automated Web Application and API Protection (WAAP) to build the ProxeeGuard SaaS WAF solution for improving customer security. This should enable Proxeem to better serve SMBs with improved cloud hosting, web hosting, and security services.
Recent Financial Results
NET’s revenue for its fiscal third quarter, ended September 30, 2021, improved 51% year-over-year to $172.35 million. The company’s non-GAAP gross profit came in at $136.56 million, up 54.8% from the prior-year period. Its non-GAAP income from operations was $2.23 million, compared to a $4.55 million loss in the year-ago period. Its non-GAAP net income was $1.35 million, compared to a $5.75 million net loss. Its non-GAAP EPS stood at $0.00, versus a $0.02 loss per share in the year-ago period. As of September 30, 2021, the company had $618.23 million in cash and cash equivalents.
For its fiscal third quarter, ended September 30, 2021, CHKP’s total revenues increased 4.9% year-over-year to $534 million. The company’s non-GAAP operating income was $261.30 million for the quarter, down 1.4% from the prior-year period. While its non-GAAP net income decreased 4.8% year-over-year to $219.80 million, its EPS increased marginally to $1.65. The company had $314.90 million in cash and cash equivalents as of September 30, 2021.
Past and Expected Financial Performance
NET’s EBITDA has declined 20.8% over the past year. Analysts expect its EPS to remain negative in the current year and next year, and its revenue to increase 48.5% year-over-year in the current year and 36% next year.
In comparison, CHKP’s EBITDA has grown 1.3% over the past year. CHKP’s EPS is expected to rise 2.2% year-over-year in the current year and 5.2% next year. Its revenue is expected to rise 4.3% in the current year and 3.6% next year.
In terms of non-GAAP forward P/E, CHKP is currently trading at 16.83x, compared to NET’s negative 2856.77x. In terms of forward EV/Sales, CHKP’s 5.42x compares with NET’s 97.23x.
CHKP’s trailing-12-month revenue is almost 3.6 times higher than NET’s. CHKP is also more profitable, with a 43.9% EBITDA margin versus NET’s negative value.
Also, CHKP’s 24.9%, 10.2%, and 17% respective ROE, ROA, and ROTC compare with NET’s negative values.
While CHKP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, NET has an overall D grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
In terms of Quality, CHKP has been graded an A, which is consistent with its higher-than-industry profitability ratios. CHKP’s 38.3% trailing-12-month levered free cash flow margin is 215.2% higher than the 12.1% industry average. In comparison, NET’s C grade for Quality is in sync with its slightly lower-than-industry profit margins. It has a 10.9% trailing-12-month levered free cash flow margin, which is 10.2% lower than the 12.1% industry average.
CHKP has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. CHKP has an 11.01x forward EV/EBITDA, which is 36% lower than the 17.19x industry average. NET’s F grade for Value reflects its extreme overvaluation. The company’s 1175.24x forward EV/EBITDA is 6734.9% higher than the 17.19x industry average.
Of the 28 stocks in the Software – Security industry, NET is ranked #20, while CHKP is ranked #5.
Beyond what we have stated above, our POWR Ratings system has also rated CHKP and NET for Growth, Momentum, Stability, and Sentiment.
Increasing IT security spending and the heightened need to protect IoT devices, software, data, and digital wallets amid rising ransomware attacks and large-scale attacks on cloud service providers have been driving the cybersecurity market’s growth. Both NET and CHKP should benefit from the industry tailwinds. However, we think its 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 Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software – Security industry.
NET shares were trading at $202.25 per share on Monday morning, up $4.99 (+2.53%). Year-to-date, NET has gained 166.15%, versus a 26.71% 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. More…