Cyber security stocks Check Point Software (NASDAQ: CHKP) and Fortinet (NASDAQ: FTNT) can hit new highs, but one is the better buy. While Check Point is a smaller company growing at a slower rate, its cost of earnings is far more reasonable, and capital returns are more substantial. The takeaway is that cyber stocks are in an uptrend supported by the rapid expansion of digitization and growth of the cloud and AI, factors also supporting the growth of cyber threats.
Check Point: when size isn’t what counts
Check Point and Fortinet had solid Q4s, with top and bottom line results outperforming the Marketbeat.com consensus estimates. At face value, Fortinet is the stronger company with more than double the revenue and twice the growth, but other factors make Check Point a superior investment. The primary is the margin.
Check Point has the industry-leading margin after 30 years in operations. This mature tech company produces nearly 50% in operating margin, a substantial figure for any business in any sector. That compares to only 26% for Fortinet, which trades at a far higher valuation. Fortinet trades at 40X its earnings, pricing in double-digit growth, but the pace of growth is slowing and priced into the market, presenting a headwind for the stock price. The company is expected to expand its margin as R&D and other costs abate, but it will be years, if ever, before it can match Check Point.
Meanwhile, Check Point’s low-to-mid-single-digit growth pace is expected to accelerate slightly in 2024. The company is also expected to improve its margins again, driving 10% bottom line growth and only costs 18X earnings. 18X is above the broad market average but cheap for a cyber security stock, industry leader Palo Alto Networks trades at 66X its 2024 consensus and others trade at far higher valuations.
Check Point takes point with share repurchases; analysts prefer it
Neither Check Point nor Fortinet pays dividends, but both repurchase shares. Both repurchases are in an amount that offsets share-based compensation and reduces the share count. However, Check Point takes the lead; its repurchases reduced the diluted count by nearly 6.75% in F2023 and are expected to continue robustly in 2024. Fortinet’s repurchases reduced its diluted count by 2.1% YOY, supporting the market but with far less strength.
Analysts are raising their targets for both stocks following the Q4 releases. However, Check Point’s Hold sentiment has been firm for the last year, while Fortinet’s has fallen from Moderate Buy to Hold, and the price target revisions are telling.
Fortinet’s revisions have kept the consensus target relatively flat over the last year; Check Point’s consensus target is trending strongly higher. Both are expected to advance about 20% to 30% higher at the top end of the range, but Fortinet might not make it that high. The first downgrade to sell has shown up on the radar, suggesting the rally in this highly-valued stock is nearing its end.
The technical outlook: two stocks at resistance, one can set an all-time high
Both stocks are trending higher in the near term. However, both show resistance to higher share prices, so a pullback may soon come. Because Fortinet is still within its trading range, while Check Point is also trending higher in the mid and long-term, it is likely to remain range-bound given the valuation and slowing growth. Check Point is above the consensus target, but the fresh revisions are leading this market higher. A pullback in the price action will likely result in a buying opportunity. The critical support level is near $160; a move below that may lead to a deeper correction.
