Key points
- Cybersecurity stocks are in an uptrend driven by growth supported by the growing use of the cloud and the growing threat to it.
- Fortinet uses its robust cash flow to buy back shares, reducing its count by 2% in 2023.
- Check Point is a smaller company with higher margins and stock repurchase power.
- 5 stocks we like better than Check Point Software Technologies
Cyber Security Securities Check Point Software NASDAQ: CHKP AND Fortinet NASDAQ:FTNT may reach new highs, but one is the better buy. Although Check Point is a smaller company that grows at a slower pace, its cost of earnings is much more reasonable and its returns on capital 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 doesn’t matter
Check Point and Fortinet reported a solid fourth quarter, with results above and below Marketbeat.com 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 primary is the margin.
Check Point boasts industry-leading margin after 30 years in business. This mature technology company produces nearly 50% of operating margin, a substantial figure for any company in any industry. That compares with just 26% for Fortinet, which trades at a much higher valuation. Fortinet trades at 40 times its earnings, pricing in double-digit growth, but the pace of growth is slowing and pricing the market in, presenting a headwind for the stock price. The company is expected to increase its margin as research and development and other costs decline, but it will take years, if ever, before it can match Check Point.
Meanwhile, Check Point’s pace of low-to-mid single-digit growth is expected to accelerate slightly in 2024. The company is also expected to improve its margins again, driving 10% profit growth and costing only 18 times useful. 18X is higher than the overall market average but affordable for a cybersecurity stock, industry leader Palo Alto Networks trades at 66X versus consensus for 2024, and others trade at much higher valuations.
Check Point bets on stock buybacks; analysts prefer it
Neither Check Point nor Fortinet pay dividends, but both buy back shares. Both buybacks have an amount that offsets the stock-based compensation and reduces the share count. However, Check Point takes the lead; its buybacks reduced the diluted count by nearly 6.75% in F2023 and is expected to continue robustly into 2024. Fortinet’s buybacks reduced the diluted count by 2.1% year-over-year, supporting the market but with much less force.
Analysts are raising their targets for both stocks following their fourth-quarter releases. However, Check Point’s Hold sentiment has remained stable over the past year, while Fortinet’s has fallen from Moderate Buy to Hold, and the price target revisions are telling.
Fortinet’s reviews have kept the consensus target relatively flat over the past year; Check Point’s consensus target is trending strongly upward. Both are expected to advance about 20-30% at the high end of the range, but Fortinet may not get that high. The first downgrade to sell has appeared on the radar, suggesting that this highly valued stock’s rally is nearing an end.
The technical outlook: two stocks in resistance, one can reach an all-time high
Both stocks show an upward trend in the short term. However, both show resistance to rising stock prices, so a pullback may occur soon. Since Fortinet is still within its trading range, while Check Point also has an upward trend in the medium to long term, it is likely to remain within a range given the valuation and slowing growth. Check Point is above the consensus target, but new revisions are taking 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 could lead to a deeper correction.
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