3 Firewall Stocks to Consider Buying

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In just the first six months of 2017, there were 918 known data breaches around the world, through which a total of 1.9 billion data records were stolen. If you compare that to 2016, it's an increase of 164% in data breaches, according to research firm Gemalto.

One of the most notable last year was, of course, the Equifax data breach, in which hackers gained access to the personal information of 143 million people. That security failure led to the company's CEO being forced to resign.

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Clearly, it's more important than ever for companies to have strong cybersecurity systems set in place, including firewalls, and companies like Fortinet (NASDAQ: FTNT), Palo Alto Networks (NYSE: PANW), and Check Point Software (NASDAQ: CHKP) make some of the best security tools out there. Read on to find out why each of them should be on investors' firewall stock short lists.

Fortinet' fast-growing firewall business

Fortinet offers its customers a wide variety of cybersecurity solutions, including its FortiWeb and FortiMail services. But the company's real breadwinner is its Fortigate firewall service, which provides about three-quarters of the company's revenues.

The company is just coming off a very strong third quarter where its sales increased 18% year over year, to $374.2 million. Net income surged a staggering 322% to $26.6 million and earnings per share hit $0.28, up by 55.6% year over year.

A significant share of Fortinet's recent growth is coming from the government sector, as U.S. federal agencies are looking to the company to meet more of their cybersecurity needs. It said that its government segment increased sales 35% in Q3 from the year ago quarter, and it just signed a seven-figure deal with the U.S. military. This should lead to even more work with the government, according to CFO Andrew Del Matto. As he he said on the earnings call back in October:

To make the stock even more appealing, Fortinet has zero debt right now, and finished Q3 with about $1.5 billion in cash. Its shares are trading at about 38 times the company's estimated forward earnings, though, which makes it a bit pricey right now compared to the broader tech sector. But Fortinet is still growing rapidly, is consistently adding new customers, and offers some of the best cybersecurity products available. All of which mean investors would be wise to give this firewall stock some consideration.

A leader in next-generation cybersecurity

When it comes to data protection, Palo Alto is a bit of a rock star. The company's next-generation firewall products are used by 42,500 companies around the world, and it added 3,000 of those customers in the last quarter alone.

Palo Alto's revenue jumped 27% to $505.5 million in the first quarter of its fiscal 2018, and subscription and support sales -- which make up about 60% of the company's top line -- spiked 36% year over year.

Investors should note that while Palo Alto is steadily growing its sales, the company still isn't profitable and it posted a $64 million loss in the first quarter. Management has focused much of its attention on growing the company's services and adding new customers, which has led it to spend most of the money it makes.

Palo Alto expects even more customer and sales growth once it releases its new Application Framework in the first half of this year. The service will use analytics and automated workflows to deliver increased security to apps and other services. On the first-quarter investor call, CEO Mark McLaughlin said:

Palo Alto's stock is trading at about 37 times the company's forward earnings, which, like Fortinet, makes it a bit pricey relative to the overall tech industry average. But it's still in a perfect position to benefit from the growing cybersecurity market. Its leading firewall services and its new applications security network should ensure that it continues to be a top player in this space. Just keep an eye out for any long-term problems Palo Alto might have with turning its sales into actual profits down the road.

The steady firewall play

Of all three of these companies, Check Point Software is probably the most stable. It sells firewalls and other cybersecurity services, has more than 100,000 enterprise customers right now, and is slowly -- but consistently -- growing its business.

Check Point increased its sales by 6.3% last quarter to $455 million and non-GAAP operating income ticked up 8.8% to $251 million. That was enough to lift the company's non-GAAP earnings per share by 15% year over year to $1.30.

You're probably noticing that most of those growth numbers aren't as high as Palo Alto's or Fortinet's. Check Point may not be growing as fast as the other two, but it makes up for it by being profitable, and by getting a huge chunk of its sales from steady recurring revenue. Recurring software sales now account for more than 70% of Check Point's top line.

On third-quarter earnings call, CEO Gil Shwed said:

In addition to its strong ongoing revenue opportunities, Check Point also has no debt and finished Q3 with $3.8 billion in cash and cash equivalents. The cybersecurity company's shares also trade at just 18 times forward earnings, which is far below the ratios of both Palo Alto and Fortinet. Investors looking for a solid firewall stock that will likely see slow, but steady, growth should give this company strong consideration.

Final thoughts

All of these companies are well-positioned to continue benefiting from the firewall and security needs of enterprise businesses in the coming years. The broad cybersecurity market is expected to expand from the $137 billion it was worth last year to about $232 billion by 2022, according to Markets and Markets. That rapid growth should allow Fortinet, Palo Alto Networks, and Check Point and their investors to benefit for years to come.

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Chris Neiger 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 Fortinet and Palo Alto Networks. The Motley Fool has a disclosure policy.

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