Forget FireEye Inc: These 2 Stocks Are Better Buys

Threat detection firm FireEye (NASDAQ: FEYE) has lost almost 60% of its market value over the past 12 months due to concerns about its slowing sales growth, rapid cash burn rate, rising competition, and executive departures. Its dismal second quarter earnings report on Aug. 4 basically confirmed allthose fears.

Revenue rose just 19% annually, down from 34% growth in the previous quarter and 56% growth a year earlier. Its GAAP net loss widened as stock-based compensation swallowed 35% of its revenue in the first half of the year, and its cash position fell from $402 million at the end of 2015 to $184 million.

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Kevin Mandia, FireEye's new CEO, recently announced job cuts to boost profitability, but downsizing could lower its defenses against bigger rivals like Palo Alto Networks (NYSE: PANW) and Cisco. Mandia also isn't interested inselling FireEye, dousing investor hopes for a quick takeover.

All these headwinds indicate that FireEye isn't an ideal play on the growing cybersecurity market. Let's examine two other stocks which could be better long-term bets than FireEye -- Palo Alto Networks and CyberArk Software (NASDAQ: CYBR).

Palo Alto Networks: A bigger and faster-growing rival

Palo Alto Networks' next gen firewalls protect over 31,000 customers, which includeover half of the Fortune 100 and Global 2000.Two years ago, Palo Alto beefedup that firewall by acquiring threat detection firm Cyvera, the backbone of its WildFire service which competes directly against FireEye. Palo Alto bundles WildFire with other platforms, including its endpoint protection software Traps and its cloud-based "security as a service" platform Aperture.

Last quarter, Palo Alto claimed that it hadreplaced FireEye in "more than 10,000 workstations and servers with Traps, and more than 20,000 users with Aperture." Those numbers clearly indicate that Palo Alto's bundling strategies are hurting FireEye. Palo Alto's growth reflects that strength -- revenue rose 48% last quarter, versus 54% growth in the previous quarter and 55% growth a year earlier. Analysts expect Palo Alto's sales to rise 47% for the year, while FireEye's sales are only expected to improve 16%.

Palo Alto's top line growth looks healthy, but its stock-based compensation rose 76% annually last quarter, gobbled up a third of its revenue, and widened its GAAP net loss from $45.9 million a year ago to $70.2 million. But on a non-GAAP basis, which excludes stock-based compensation and other expenses, its net profit rose 88% annually to $38.5 million. On that basis, analysts expect Palo Alto's earnings to rise 93% this year, while FireEye's earnings are expected to improve just 19%.

CyberArk Software: A profitable player in an unprofitable market

While FireEye and Palo Alto both compete in the increasingly crowded field of network perimeter solutions, CyberArk dominates the niche market for PAM (privileged accounts management) solutions -- which counter insider threats like disgruntled employees.

The company serves over2,600 customers worldwide -- including 40% of the Fortune 100 companies and 17 of the 20 biggest banks in the world -- and itsPAM platform is the only one to be certified by U.S. Department of Defense. It also leads the C3 Alliance, a consortium ofcompanies which integrate CyberArk's PAM solutions into their own security suites. Its growing list of members includes Symantec, FireEye, and Intel Security.

Growing demand for PAM solutions boosted CyberArk's revenue 39% annually lastquarter, compared to 42% growth in the previous quarter and 70% growth a year earlier. Analysts expect its full-year sales to rise 32%. While CyberArk's sales growth is slowing down, its market-leading position gives it better control over its prices and expenses. That's why CyberArk is one of the few cybersecurity companies which is profitable by both GAAP and non-GAAP metrics.

Last quarter, CyberArk's GAAP net income rose 31% annually to $6.4 million, while its non-GAAP net income grew 62% to $10.5 million. CyberArk spent less than 8% of its revenues on stock-based compensation last quarter. However, that percentage could rise over the next few quarters as it expands its sales and marketing teams. Due to higher operating costs from that expansion, CyberArk's non-GAAP earnings are expected to rise just 7% this year before accelerating to20% growth next year.

But mind the valuations...

FireEye is in worse shape than Palo Alto Networks and CyberArk, but its steep decline over the past year has reduced its P/S ratio to just 3.7 -- which is lower than the industry average of5 for software companies. Palo Alto and CyberArk both trade at 10 times sales. Therefore, Palo Alto and CyberArk are better cybersecurity plays than FireEye, but their upside potential could ultimately be limited by their valuations.

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Leo Sun owns shares of Cisco Systems and CyberArk Software. The Motley Fool owns shares of and recommends FireEye. The Motley Fool recommends Cisco Systems, CyberArk Software, Intel, and 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.