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These cyber security stocks can hit new highs

Key points

  • Cybersecurity stocks are in a growth-driven uptrend backed by growing cloud usage and the growing threat to it.
  • Fortinet uses its strong cash flow to buy back shares, reducing the count by 2% in 2023.
  • Check Point is a smaller company with superior margins and share buyback power.
  • 5 stocks we like better than Check Point Software Technologies

Cybersecurity actions Checkpoint software NASDAQ:CHKP and Fortinet NASDAQ:FTNT It may reach new highs, but one is the best buy. While Check Point is a smaller company growing at a slower pace, its cost of earnings is much more reasonable and capital returns are more substantial. The bottom line is that cyber stocks are in an uptrend supported by the rapid expansion of digitalization and the growth of cloud and artificial intelligence, factors that also support the growth of cyber threats.

Check Point: when size is not what counts

Check Point and Fortinet both had strong fourth quarters, with top and bottom lines that beat consensus estimates. At first glance, Fortinet is the stronger company with more than double the revenue and double the growth, but other factors make Check Point a superior investment. The main one is the margin.

Check Point has the industry-leading margin after 30 years in operation. This mature technology company produces almost 50% of the operating margin, a substantial figure for any business in any sector. That compares to just 26% for Fortinet, which trades at a much higher valuation. Fortinet trades at 40 times earnings, pricing in double-digit growth, but the pace of growth is slowing and priced into the market, presenting a headwind for the share price. The company is expected to expand its margin as R&D and other costs decline, but it will be years, if ever, before it can match Check Point.

Meanwhile, Check Point’s low- to mid-single-digit growth pace is expected to accelerate slightly in 2024. The company is also expected to improve its margins again, driving 10% top-line growth and only cost 18 times the earnings. 18X is above the overall market average, but cheap for a cybersecurity stock, with industry leader Palo Alto Networks trading at 66 times its 2024 consensus and others trading at much higher valuations.

Check Point Gains Ground With Share Buybacks; analysts prefer it

Neither Check Point nor Fortinet pay dividends, but both buy back shares. Both buybacks are for an amount that offsets stock-based compensation and reduces the share count. However, Check Point takes the lead; its buybacks reduced diluted count by nearly 6.75% in F2023 and are expected to continue strongly in 2024. Fortinet’s buybacks reduced its diluted count by 2.1% year-over-year, supporting the market but much less strongly.

Analysts are raising their targets for both stocks following the fourth-quarter releases. However, Check Point’s Hold sentiment has been firm over the past year, while Fortinet’s has fallen from Moderate Buy to Hold, and the price target revisions are telling.

Fortinet reviews have kept the consensus target relatively stable over the past year; Check Point’s consensus target is trending strongly bullish. Both are expected to advance another 20% to 30% at the top end of the range, but Fortinet may not go as high. The first downgrade to sell has appeared on the radar, suggesting that the rally in this highly valued stock is coming to an end.

The technical perspectives: two stocks in resistance, one can mark an all-time high

Both stocks are trending up in the short term. However, both are showing resistance to rising share prices, so a pullback could soon occur. Because Fortinet is still within its trading range while Check Point is also in a medium to long-term bullish trend, it is likely to remain range-bound given the valuation and slowing growth. Check Point is above the consensus target, but new revisions are driving this market higher. A pullback in price action will likely result in a buying opportunity. The critical support level is near $160; a move below that may lead to a deeper correction.

Checkpoint Stock Chart

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