Better Buy: FireEye vs. Check Point Software

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Cybersecurity specialists Check Point Software Technologies (NASDAQ: CHKP) and FireEye (NASDAQ: FEYE) have enjoyed divergent fortunes on the stock market after their latest set of results. While Check Point's light forward guidance issued in July took a toll on investor confidence, FireEye has gone from strength to strength on the basis of robust growth in its subscription business that helped it post a sunny outlook.

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But does FireEye's momentum make it a better bet than Check Point, or does the latter offer more value after its latest dip? Let's take a look.

The case for FireEye

FireEye has executed a terrific turnaround after a slow start to the year, thanks mainly to accelerated growth in the subscription business, which has brought sustained profitability within its reach. As it stands, the cybersecurity player now gets  83% of its revenue from the subscription side of the business, up from 77% in the year-ago quarter.

The company has vastly reduced its reliance on product revenue (which fell 23% year over year last quarter) as it shifts gears to bring in more subscription revenue. The strategy has worked wonders for FireEye's margins, helping it cut down the loss per share from $0.33 to just $0.04 year over year.

This isn't surprising: Higher subscription revenue means the company has to spend less money on customer acquisition, as it gets repeat purchases and recurring revenue from its existing client base. As a result, it cut its operating expenses by almost a fourth on a year-over-year basis last quarter, driven by a steep decline of 26% in sales and marketing outlay.

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In the quarters ahead, FireEye's push toward profitability will probably be helped by the Helix security platform, which now offers comprehensive cybersecurity features to customers after the addition of new modules. This platform's scalability allows it to be deployed by small and big clients alike, paving the way for FireEye to tap the security-as-a-service space that is estimated to grow at an annual rate of 19% until 2021.

In fact, FireEye is already reaping the benefits of the comprehensive Helix platform in the form of an increase in cross-selling of other services. CTO Grady Summers has pointed out that FireEye saw "more than $2 of additional product and subscription pull-through for every $1 that a customer spent on Helix" over the second quarter.

So FireEye should be able to sustain its impressive momentum, provided it keeps executing its subscription strategy flawlessly.

The case for Check Point Software

Check Point Software's recent troubles are a result of Yom Kippur, a holiday in Israel (where the company is based), falling on the last day of the quarter this year. The company has taken a cautious approach and issued low guidance since it gets a substantial amount of business during the closing days of the quarter.

So investors shouldn't be hitting the panic button as the company's long-term growth story is still intact. Like FireEye, Check Point is now relying more on subscription sales to boost profitability.

The company saw a 27% spike in sales of subscription blades (security applications and modules) last quarter, pushing its subscription business to 25% of overall revenue. As a result, Check Point's operating expense growth slowed down to less than 8% last quarter as compared to the double-digit growth seen over the past couple of years.

Check Point can afford to spend more money to push its subscription business as it is spending less than 25% of its revenue on sales and marketing. By comparison, FireEye spends around 48% of its revenue on selling and marketing.

Furthermore, Check Point is looking to capitalize on the recent spate of cyberattacks through its recently launched consolidated security platform -- Check Point Infinity. This architecture can provide security across different platforms, including the cloud, enterprise networks, and mobile.

This integrated security platform puts Check Point at par with other cybersecurity providers such as FireEye, allowing it to provide multiple threat-prevention and detection modules to organizations of varying sizes. More importantly, Check Point is financially well-placed to push this platform to more customers, which could be a key differentiator when considered as an investment alongside FireEye.

The verdict

Check Point has a solid cash position of $1.6 billion and no debt. This compares favorably to FireEye's cash position of $870 million and debt of $760 million. Check Point, therefore, can afford to either take on debt or spend its cash to attract more customers by way of product development or by pouring more money into sales and marketing.

Furthermore, Check Point has already attained profitability and it can keep getting better as subscription sales increase. On the other hand, FireEye needs to rapidly bring down its expenses to get where Check Point is, and it will be prone to volatility if it fails to live up to Wall Street's expectations. As a result, Check Point Software seems to be the safer cybersecurity play right now, given its track record and robust balance sheet.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends FireEye. The Motley Fool has a disclosure policy.