Better Buy: Fortinet Inc. vs. Check Point Software Technologies Ltd

By Markets Fool.com

The question of which is the better buy, Fortinet (NASDAQ: FTNT) or Check Point Software Technologies (NASDAQ: CHKP), would appear to be a no-brainer. Though both stocks are down since announcing so-so second-quarter earnings results and disappointing forecasts for the current quarter, based on its 9% jump in share price year to date, investors seem to be in Fortinet's camp.

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Check Point's share price is down nearly 8% in 2016, though it's worth noting 7% of that decline has come since announcing Q2 earnings results on July 26. But there's a bit more to the Fortinet and Check Point stories, including polar opposite management styles, Check Point's recent change in business focus, which will affect the next couple of quarters, and bottom-line results.

Image source: Fortinet.

The case for Fortinet

Fortinet has increased revenue by 30% or more following Q2's $311.4 million for a year straight. CEO Ken Xi noted that while Fortinet's billings didn't quite match the pace of its top-line growth, the $373.8 million was good for a 26% year-over-year improvement.

Add non-GAAP (excluding one-time items) earnings per share (EPS) of $0.14, good for a 33% improvement, and Fortinet seemingly had a solid quarter. However, like Check Point and others in the data security space, including Palo Alto Networks (NYSE: PANW), Fortinet's guidance for the current quarter left pundits and investors wanting.

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Fortinet's guidance included $0.17 to $0.18 non-GAAP EPS along with revenue in a range of $319 million to $324 million. Not bad when you consider analysts' consensus estimates are for earnings of $0.18 per share and sales of $320.15 million: both well within Fortinet's own expectations for the current quarter.

At the mid-point of Fortinet's revenue forecast, Q3 will see the end of the aforementioned string of quarterly sales gains of 30% or more. Assuming Fortinet sales total $322 million this quarter, that equates to "just" a 24% improvement compared to 2015's Q3. The problem with slowing sales is that Fortinet investors have essentially ignored the company's lack of profitability because it was growing sales so consistently. But those days are over.

Image source: Check Point.

The case for Check Point

Check Point has taken a slower, more cautious approach to growth. Until last quarter's 7% revenue bump to $423 million, it had boosted its top line by 9% a quarter for nearly a year and a half straight. It's not in the same ballpark as Fortinet, nor will it be, given Check Point CEO Gil Shwed's commitment to expense management rather than a "growth at all costs" mentality.

As was the case with Fortinet, Check Point's top and bottom lines both met Q2 expectations, but revenue and EPS guidance for Q3 landed in the mid to low end of analyst estimates. Check Point expects sales to fall in a range of $405 million to $435 million in Q3 and non-GAAP per-share earnings between $1.03 to $1.10. That compares with the Street's estimates of $422.8 million in sales and EPS of $1.08.

Should Check Point deliver on the high end of its revenue target in Q3, it would be particularly impressive. Not only would a third quarter of around $425 million equal a 5% improvement year over year, it would do so without the benefit of as much as $10 million in sales. Check Point's shift to a subscription-based model means some revenue is no longer recognized immediately.

In other words, if not for an accounting change that will affect both Q3 and Q4 results by deferring revenue into 2017 -- as much as $20 million is expected to roll over to 2017 in Q4, plus the $10 million this quarter -- Check Point would have enjoyed an 8% jump in revenue this quarter -- if it's able to deliver around $425 million.

In Q3, the modular software blade products -- home of its subscription sales -- reported a 21% revenue gain to $93 million and are making up an ever-larger piece of Check Point's revenue pie. That, along with Shwed's spending control, is why Check Point will remain consistently profitable while Fortinet continues to battle with soaring overhead.

To put that into perspective, Check Point's operating expenses in Q2 equaled 52% of sales. Fortinet? Its operating expenses are equal to 74% of sales, and that's up from last year's 70%.

For those of us who prefer consistent growth, profits, and sound fundamentals, Check Point is the stock to buy, hands down.

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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.