Forget Palo Alto Networks Inc: These 2 Stocks Are Better Buys

By Tim Brugger Markets Fool.com

Image source: Getty.

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The good news for shareholders of Palo Alto Networks (NYSE: PANW) is that the stock has rebounded following a dismal 2016, jumping 16% in January. The not-so-good news is that wild stock price fluctuations are par for the course with Palo Alto. Now, after nearly two years of growing revenue more than 50%, Palo Alto is seeing its sales growth -- like that of many of its peers -- slowly coming back down to earth.

Without the sky-high revenue, investors and some pundits are taking a closer look at the rest of Palo Alto's financials, and what they see doesn't paint a pretty picture. However, there are data-security providers that offer exposure to a market expected to soar in the coming years and are financially sound, offer industry diversification, and carry less volatility than Palo Alto. Two that come to mind as better buys -- though for different reasons -- are Cisco Systems (NASDAQ: CSCO) and Check Point Software (NASDAQ: CHKP).

Image source: Cisco.

Security and beyond

Data security sales are fairly low on the list of revenue drivers for Cisco today, but that's changing with each successive quarter. Of its primary units, security was handily Cisco's fastest-growing business last quarter, and don't be surprised to see more of the same when it announces fiscal 2017 second-quarter results on Feb. 15.

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Cisco's security sales accounted for $540 million of its $12.4 billion in total revenue last quarter, and that's already more than Palo Alto and Check Point. Security grew 11% compared with a year ago, and with Cisco CEO Chuck Robbins' strategy of shifting to burgeoning markets, including cloud data centers and the Internet of Things, data security will become increasingly important.

That's one of the upsides to Cisco in the security space. Because Cisco is also leading the charge in other fast-growing opportunities, it isn't overly reliant on one market. The introduction of Cisco's new "Digital Building Switch" that delivers "smart" functionality to buildings is one recent example of its diverse offerings. And with a 3.4% dividend yield, Cisco is a much better buy than Palo Alto for growth and income investors.

Image source: Check Point Software.

Slow and steady

When Check Point shared its fourth-quarter results on Jan. 19, its stock jumped about 7% and has maintained those gains since. That may come as a surprise, given that its revenue climbed only 6%. Palo Alto disappointed last quarter, reporting a 34% sales improvement. Why the different response? The answer to that question is why Check Point is a better buy, particularly for investors who prefer relative stability.

Though Check Point's revenue grew 6%, its earnings per share (EPS) climbed 21% including one-time items. Palo Alto's EPS, despite its 34% increase in sales to $398.1 million, was a loss of $0.69 a share, 47% worse than a year ago. Check Point's 26% increase in its low overhead, recurring subscription revenue of $110 million, and CEO Gil Shwed's cost-management efforts translate to a strong bottom line.

Check Point was able to report such stellar EPS results because its total expenses -- both cost of revenue and operating expenses -- equaled 50% of its $486.7 million in revenue. Palo Alto spent $50 million more than its total revenue in the quarter, which is why EPS continues to decline along with its sales growth.

Still a favorite

Analysts aren't quite as enamored with Palo Alto as they were a few months ago, though the consensus price target is still $176.67, equal to nearly 20% appreciation in the near term. One pundit suggests Palo Alto shares will climb as high as $210.

Neither Cisco nor Check Point has earned analysts' good tidings, at least to the extent Palo Alto has. That said, Cisco's market diversification, its fast-growing security sales, and an industry-leading dividend make it a hands-down better buy. And for a pure-play data-security alternative, Check Point offers a few things Palo Alto doesn't: increasing profits; a focus on consistent, sustainable growth; and relative stock price stability.

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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 Cisco Systems and Palo Alto Networks. The Motley Fool has a disclosure policy.