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FireEye vs. Palo Alto: Which Is the Better Stock?

It wasn't too long ago that FireEye 's stock was fast approaching a price of $100 per share. The stock now trades around $30. Meanwhile, cybersecurity peer Palo Alto Networks is trading near its all-time high, after a stock gain of more than 80% to date in 2014. It closed Friday at $107. Given the large stock performance disconnect between these two security leaders, let's take a look at which stock now presents the best investment value.

FireEye vs Palo Alto: What's the difference?

With high-profile cyberattacks on companies including Target , Home Depot , and JPMorgan Chase , companies are stepping up their security efforts to prevent major hacking attacks. Target's customer data breach cost the big-box retailer $230 million in the second quarter alone, nearly six months after the attack. Therefore, it makes sense for large corporations and even small businesses to spend extra money on the latest security software if it can ultimately save them money and maintain consumer confidence.

FireEye uses a network of more than 2 million virtual machine-based security platforms to identify advanced threats. Once a single platform recognizes the threat, the entire network becomes aware and can quickly alert the customer. Thanks to the acquisition of forensic cybersecurity specialist Mandiant, FireEye can then analyze the attack, find the source, and eliminate it.

Palo Alto Networks sells next-generation security products that identify the threat and prevent it from entering a network. While FireEye's focus is advanced threats, those that cannot be detected on older software, Palo Alto's niche market is advanced firewalls and malware protection. Like FireEye, Palo Alto targets the enterprise customer, offering software and services for protection of servers, as well as virtual and cloud environments.

What's the market opportunity?

Palo Alto sells software and services that are essentially an upgrade to older software. The hope is that corporations will consider its technology crucial given the alarming volume of cyberattacks. As a result, the market opportunity for Palo Alto is considered huge, seeing as how malware protection and firewalls are essential in all businesses.

According to a Morgan Stanley survey of chief security officers, just 2% said they used Palo Alto as their primary firewall vendor, and only 8% used its services as a secondary vendor. However, 25% of CSOs said they planned to use Palo Alto as either a primary or secondary vendor at their next firewall refresh. While it's unknown how many CSOs were surveyed, or their respective industries, this data illustrate why investors are so excited about Palo Alto's prospects.

Meanwhile, FireEye is trying to create a new industry, and to convince large corporations to invest in advanced protection. While shares traded lower by nearly 20% following FireEye's third-quarter report, the company's growth shows that its plan is working.

FireEye's quarterly revenue grew nearly 168% year over year to $114 million. But more importantly, its third-quarter billings rose 45% over the second quarter, to $165 million, and its deferred revenue increased a whopping $152.2 million, to $282.9 million. What makes FireEye's deferred revenue even more impressive is that nearly 60% of the company's third-quarter revenue came from subscriptions, maintenance, and services, which are recurring and will be reported in future quarters. This suggests FireEye's explosive revenue growth should remain intact.

If Palo Alto controls 25% of its targeted market, even 50% over the long term, further growth will naturally become more difficult to achieve. In looking at 2015 and 2016, analysts expect Palo Alto to grow revenue by 37% and 31%, respectively, which is a good reflection of the company growing its market share.

Meanwhile, FireEye is proving that its software, services, and products are in fact creating a new market. In the process, FireEye is expanding its operations to offer new services. These include support for Apple operating environments, mobile threat prevention solutions, data center threat prevention solutions, and cloud-based email threat protection.

In late October FireEye began to provide global security solutions to Verizon 's enterprise customers. This partnership would not be possible had FireEye not expanded globally and released new products such as mobile threat prevention. This shows FireEye's new customer growth and future partnerships are highly connected to its ability to create new services. In essence, partnering with Verizon might be FireEye's tipping point, proof that corporations are adopting its technology on a large scale.

Foolish thoughts

The biggest concern about FireEye has always been the unknowns of how big its market could become, coupled with a market capitalization that valued the company at 30 times 12-month sales. However, revenue and billings growth validate the demand for FireEye's products, and following its third-quarter earnings, the stock now trades at a much more conservative premium of 12.5 times trailing-12-month sales.

With both Palo Alto and FireEye still unprofitable, price-to-sales is likely the best metric to assess valuation. Despite FireEye growing at three times the rate of Palo Alto, the two stocks are now similarly valued thanks to FireEye's over 60% stock loss since March. At 14 times trailing-12-month sales, it's difficult to make a case that Palo Alto is the better investment. When studying the two stocks now, FireEye looks like a far better long-term investment opportunity.

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The article FireEye vs. Palo Alto: Which Is the Better Stock? originally appeared on Fool.com.

Brian Nichols owns shares of Apple, JPMorgan Chase, and Verizon Communications. The Motley Fool recommends Apple, Home Depot, and Palo Alto Networks. The Motley Fool owns shares of Apple and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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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.

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