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The remote lifestyle and a rapid digital transformation have led to an increased number of ransomware attacks and generalized hacking, given the increasing dependency on cloud computing. With the resurgence of COVID-19 cases and the continuation of hybrid working, cybersecurity companies should witness steady demand for their products and solutions. According to Grand View Research, the global cyber security market is expected to grow at a CAGR of 10.9% until 2028.
With this in mind, today I’ll be analyzing and comparing two prominent cybersecurity stocks: Check Point (CHKP) and Zscaler (ZS). Headquartered in Tel Aviv, Israel, CHKP is engaged in developing and marketing a range of products and services for IT security worldwide. The company offers a portfolio of network security, endpoint security, data security, and management solutions. ZS is a cloud-based security company that provides a platform built as a multi-tenant, distributed cloud service designed to scale and deliver real-time insights into security issues. It mainly offers two principal cloud services —Zscaler Internet Access and Zscaler Private Access.
ZS has gained 1.8% over the past six months, while CHKP has returned 14.8%. However, CHKP’s 2.3% gains over the past three months are significantly higher than ZS’ negative returns. But which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On August 30, 2021, CHKP announced the acquisition of Avanan, the fastest-growing cloud email security company. Dr. Dorit Dor, CHKP’s Chief Product Officer, said, “More and more businesses are moving to cloud-email platforms and with email becoming a major channel to launch devastating cyber-attacks, this acquisition represents a huge potential as organizations are looking for a new approach to email and collaboration suite security.”
On November 30, 2021, Jay Chaudhry, Chairman, and CEO of ZS, said, “CISOs and CIOs are looking to phase out legacy network security in favor of zero trust architecture, due to increasing cyber and ransomware risks and accelerating digital transformation. This architecture shift continues to drive strong demand for our Zero Trust Exchange platform.”
Recent Financial Results
CHKP’s revenue increased 5% year-over-year to $534 million for the fiscal third quarter ended September 30, 2021. The company’s non-GAAP operating income grew 49% year-over-year to $261 million. Also, its non-GAAP EPS came in at $1.65, up 1% year-over-year.
ZS’ revenues increased 62% year-over-year to $230.50 million for the fiscal first quarter ended October 31, 2021. The company’s non-GAAP income from operations grew 21.8% year-over-year to $23.95 million. Also, its non-GAAP EPS came in flat at $0.14 year-over-year.
Past and Expected Financial Performance
CHKP’s revenue and total assets grew at CAGRs of 4% and 1%, respectively, over the past three years. Analysts expect CHKP’s revenue to increase 4% for the quarter ending March 31, 2022, and 3.6% next year. The company’s EPS is expected to grow 5.2% for the quarter ending March 31, 2022, and 5.9% next year. Moreover, its EPS is expected to grow at 6.6% per annum over the next five years.
On the other hand, ZS’ revenue and total assets grew at CAGRs of 52.7% and 70.5%, respectively, over the past three years. The company’s revenue is expected to increase 45.8% for the quarter ending April 30, 2022, and 34.1% next year. Its EPS is expected to decline 33.3% for the quarter ending April 30, 2022, but grow 76.9% next year. Also, ZS’ EPS is expected to increase at 45.4% per annum over the next five years.
Profitability
CHKP’s trailing-12-month revenue of $2.13 billion is significantly higher than ZS’ $761.04 million. CHKP is also more profitable with an EBITDA margin and net income margin of 43.85% and 38.78%, respectively, compared to ZS’ negative returns.
Furthermore, CHKP’s ROE, ROA, and ROTC are 24.86%, 10.21%, and 17% compared to ZS’ negative values.
Valuation
In terms of forward non-GAAP P/E, ZS is currently trading at 502.33x, higher than CHKP’s 17.23x. Moreover, ZS’ forward EV/EBITDA ratio of 283.28x is higher than CHKP’s 11.37x.
So, CHKP is relatively affordable here.
POWR Ratings
CHKP has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, ZS has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
CHKP has a B grade for Value, consistent with its forward EV/EBIT of 11.57x, 42.5% lower than the industry average of 20.13x. However, ZS has a D grade for Value, in sync with its forward EV/EBIT of 393.35x, 1,854.1% higher than the industry average of 20.13x.
Moreover, CHKP has a grade of A for Quality. This is justified given CHKP’s 38.78% trailing-12-month net income margin, 506% higher than the industry average of 6.40%. On the other hand, ZS has a Quality grade of C, in sync with its negative trailing-12-month net income margin, compared to the industry average of 6.40%.
Of the 27 stocks in the Software – Security industry, CHKP is ranked #4. In comparison, ZS is ranked #18.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the CHKP ratings. Also, get all the ZS ratings here.
The Winner
The demand for advanced cybersecurity solutions is expected to increase with the growing number of cybercrimes in this digital era. While both CHKP and ZS are expected to gain, I believe it is better to invest in CHKP now because of its lower valuation, higher profitability, and better growth prospects.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software – Security industry here.
CHKP shares were trading at $119.88 per share on Monday afternoon, up $0.38 (+0.32%). Year-to-date, CHKP has gained 2.85%, versus a -2.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal’s fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More…
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