Markets

Cybersecurity Stocks: Which Is the Best?

By Brian Nichols, InvestorPlace Contributor

FireEye (FEYE), Palo Alto Networks (PANW) and Cyberark Software (CYBR) are all providers of advanced cybersecurity products. While each company provides a vast array of services, each company also has a niche that defines it.

Palo Alto specializes in firewalls; FireEye utilizes more than two million virtual networks to fend against complex attacks; and Cyberark’s prevents the spread of viruses by locking threats out of privileged accounts as to restrict the movement of malware within a company’s network.

So while each of these companies are different, each is also promising; but in looking at each company purely from a valuation and efficiency standpoint, which is best of the cybersecurity stocks?

PLUS: 10 Dividend Stocks to Load Up on for the Rest of 2015

The answer to that question comes in three parts. First, how fast is each business growing? Second, how much money is each company spending to achieve that growth? Lastly, what is the valuation of each company relative to growth and efficiency?

How Fast Is Each Business Growing?

So, in respect to growth, let’s see how each company pans out.

Year PANW FEYE CYBR
2015 Expected Revenue Growth 39.4% 50.6% 44%
2016 Expected Revenue Growth 31.5% 37.5% 31%

One thing I’d like to note in regards to Cyberark’s projections is that it doesn’t seem consistent with the company’s actual performance. Cyberark grew revenue 89% in the first quarter followed by 70% in its most recent quarter. Further, the company had license revenue growth of 100%, which supports future recurring revenue growth.

That said, both Palo Alto and FireEye have both consistently exceeded analyst expectations, so in retrospect, these growth figures, too, are likely quite conservative. This conservative outlook, however, applies to Cyberark especially.

Which Company Pays the Least for Its Growth?

What might be most important is how much money each of these cybersecurity stocks spends to achieve the aforementioned growth. This is a cybersecurity industry where companies are spending big bucks to fuel growth. With these companies all growing at a similar rate, one could make a strong case that spending as a percentage of revenue should also be near equal.

If there’s a big disconnect in favor of one company spending far less to achieve the same growth rate, then theoretically, it would not only be the most efficient, but also have the fewest risks.

So, let’s see how this all plays out, and keep in mind, total operating expenses and revenue is on a trailing 12-month basis.

Expense/Revenue PANW FEYE CYBR
Revenue $928 million $530 million $133 million
Total Expenses $1.06 billion $1.03 billion $102 million
Expenses/Revenue Ratio 1.14 1.94 0.76

Perhaps you’ve never seen an expenses-to-revenue ratio, but what it essentially shows is how much money each company had to spend in order to achieve $1 in revenue.

Palo Alto is near breakeven, but the fact that FireEye has to spend $1.94 for every $1 in revenue makes you wonder whether it could grow at all if not spending so ferociously. Eventually, investors will want profits, and FEYE investors must be concerned that FireEye can’t produce both profits and growth.

Meanwhile, Cyberark is on a different level of efficiency. It spent just $0.76 over the last year for each dollar created, and is growing at a similar rate to Palo Alto and FireEye.

That’s mind-boggling, and suggests that so long as Cyberark isn’t valued at a ridiculous multiple to its peers, then it is in fact the best investment moving forward.

But Who Has the Best Valuation?

FireEye and Cyberark both trade at a multiple of around 11 times sales, whereas Palo Alto trades at a richer 16 times sales. This might be the best metric for valuation, because neither Palo Alto nor FireEye are profitable, thus not carrying the same 23% operating margin as Cyberark.

With $46 million in free cash flow over the last year, Cyberark trades at less than 35 times FCF. For a company that grew revenue at an average rate of nearly 80% during the first six months of this year, such a multiple is conservative.

Not to mention, Cyberark’s 12-month free cash flow has increased over 140% versus this time last year, implying that CYBR’s FCF will continue to rise as it grows larger.

Nevertheless, these combined factors suggest that Cyberark is a better long-term investment opportunity than FEYE or PANW. It not only has the growth and margins, but also an attractive valuation, whereas FEYE is not profitable and PANW’s stock is too expensive.

So while CYBR might not be the most hyped of cybersecurity stocks, the fundamentals don’t lie.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities, but may initiate a long position in CYBR in the next 72 hours.

This article was originally published on InvestorPlaceMedia.

Plus:

7 Ways to Invest in Virtual Reality

3 Double-Growth Financial Stocks to Buy

Darden Earnings Make DRI Stock a Buy in a Down Market

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

InvestorPlace

InvestorPlace is one of America’s largest, longest-standing independent financial research firms. Started over 40 years ago by a business visionary named Tom Phillips, we publish detailed research and recommendations for self-directed investors, financial advisors and money managers.

Learn More