Better Buy: Palo Alto Networks Inc vs. Check Point Software Technologies Ltd?

By Markets Fool.com

In the world of cybersecurity, big hitters like IBM may be the first providers that come to mind. With the advent of the Internet of Things (IoT), and the unprecedented amount of data a "connected" world brings with it, combined with the continued shift to cloud-based data centers, it's natural that a provider on the scale of IBM is top of mind.

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But with the global cloud data-security market expected to reach nearly $9 billion by 2020, there's plenty of room for relatively smaller players, too. Toward that end, Palo Alto Networks , and one of its chief rivals,Check Point , are both working to expand their respective data-security reach, and each is successful in its own right.

However, Palo Alto and Check Point are taking different paths to reach their business objectives. So which is the better buy? That will depend on your investment philosophy.

Image source: Palo Alto Networks.

The case for and against Palo Alto Networks
Last quarter, Palo Alto's fiscal 2016 Q2, revenue jumped a whopping 54%, to $334.7 million. That's significant in and of itself; but what's really impressive is that it marked the seventh straight quarter of 50%-plus sales growth. The remarkable revenue-growth string will likely end this quarter based on Palo Alto's forecast revenue of $335 million to $339 million, equal to "just" a 43% to 45% improvement.

Palo Alto has expanded its cloud-based security offerings, and boasts a nearly 50-50 split between its product and service revenues. Problem is, Palo Alto was in the red again last quarter, an ongoing theme with no sign of relief. What makes Palo Alto's string of losses concerning is the reason why: compensation for its sales force.

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A full 56% of Palo Alto's Q2 revenue went to sales and marketing -- the majorityto pay its salespeople -- which is nearly 80% higher than a year ago. In 2015's Q2, Palo Alto paid out $60.6 million in share-based compensation; this year it paid $106.9 million.

It's one thing to invest in developing new products or infrastructure, but Palo Alto's losses will continue as long as its compensation expense climbs, because that's not a one-off item. Until that gets remedied, investors will have to be content with Palo Alto's sky-high revenue, and the losses that go along with it.

Image source: Check Point.

The case for and against Check Point
Similar to Palo Alto, Check Point has a revenue-growth string of its own; unfortunately, its string doesn't measure up to many of its competitors. Check Point announced revenue of $404 million in 2016's Q1, good for its sixth straight quarter of 9% top-line growth. Stacked up against Palo Alto's sales results, Check Point pales by comparison. But solid, if not spectacular, revenue growth doesn't tell the whole story.

Thanks in part to sound expense management, Check Point bumped its GAAP (including one-time items) earnings per share (EPS) up about 10% last quarter, to $0.95 from 2015's $0.87. Check Point also introduced its new "high-end and data center security" products last quarter, and, according to founder and CEO Gil Shwed, they hit the streets running, enjoying a "great start in the marketplace."

Rather than battle the elephant in the room, Shwed said that Check Point deepened its relationship with cloud, IoT, and security behemoth IBM last quarter. The expanded alliance with IBM includes sharing security data and additional collaboration to defend against cybercrime. Strategic alliances don't always result in profitable relationships, but positioning itself alongside an industry leader like IBM could prove to be a great resource for Check Point to enhance both its offerings and reach.

Is Palo Alto or Check Point stock the better buy? That's akin to deciding between the tortoise and the hare. For investors who prefer slow-but-steady growth, strong fundamentals, profitability, and expectations of more to come, Check Point is the better buy. For patient investors comfortable with a 'high growth at all costs' mentality -- with the promise of positive EPS at some point in the future -- Palo Alto moves to the top of the list.

The article Better Buy: Palo Alto Networks Inc vs. Check Point Software Technologies Ltd? originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Palo Alto Networks. 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.