Proofpoint Growing On The Back Of Human Error

In college, I had a friend whose father was an aeronautical engineer and who liked to say that whatever improvements they could make in terms of avionics and flight control systems, they couldn't do as much about "the squishy pink thing at the front". In other words, human error is always a factor in complex systems, and that applies to network security as well. While firms like Palo Alto (NYSE:PANW) and Check Point (NASDAQ:CHKP) do a lot to secure enterprises from an array of threats, companies are still vulnerable to an employee clicking on a malware attachment or inadvertently (or deliberately) sending out privileged information.

That's where Proofpoint (NASDAQ:PFPT) comes in. This company has developed a suite of cloud-based products to help protect enterprises from email-based threats, targeted attacks, and data loss, as well as assist in archiving and governance. These shares are not cheap, not even on the basis of growth stock norms, but the company is gaining share, expanding its addressable market, and starting to see margin leverage.

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Proofpoint Growing On The Back Of Human Error

Seeking Alpha: Check Point Software - Solid Performance, Familiar Worries

The more things change, the more they stay the same for Check Point Software Technologies (NASDAQ:CHKP). While this Israeli IT security company still has a leading presence in enterprise IT security and margins that many CEOs could only dream of, a segment of the investing world remains steadfast that the company is doomed to lose share to Palo Alto (NYSE:PANW), Fortinet (NASDAQ:FTNT), and other relative newcomers over time.

To be fair, Check Point has lost market share ... but the erosion seen in recent years has been less than the bears predicted. What's more, while Check Point's "fast follower" strategy means it will always arrive after the party has started, the company seems to have a credible platform for advanced threat detection, endpoint security, and cloud. The shares aren't dramatically undervalued, but they do trade below fair value, and I still think this is a quality idea in the tech space.

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Check Point Software - Solid Performance, Familiar Worries

Seeking Alpha: Check Point Doesn't Need To Feel Insecure

The way things have been going lately, you'd think that Check Point Software Technologies (NASDAQ:CHKP) showed up to a Formula 1 race on a tandem bike. Check Point is certainly being outgrown by up-and-comers in security like Palo Alto (NYSE:PANW), Fortinet (NASDAQ:FTNT), and FireEye (NASDAQ:FEYE), and the shares have largely missed out on the hockey stick rise in security stock prices, but I wouldn't exactly call this leading firewall company chopped liver either.

I do believe that Check Point will hold more share in firewalls than many seem to think, and I think the company's fast-follower approach into areas like endpoint security do offer growth in the coming years. But to recycle that prior metaphor, talking about fair value in the context of software stocks can often feel like bringing a bike to a car race, and Check Point shares don't exactly jump out as shockingly undervalued on an absolute basis.

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Check Point Doesn't Need To Feel Insecure

Seeking Alpha: Strong Share Growth And Margins Fueling Palo Alto Networks

By most reasonable metrics, Palo Alto Networks (NYSE:PANW) has a gravity-defying valuation. Then again, there's nothing particularly "reasonable" about the market share that Palo Alto is gaining within the growing security space, nor the company's strong positioning across a variety of technologies. If Cisco (NASDAQ:CSCO) and Check Point (NASDAQ:CHKP) can't do a better job of repositioning themselves to the leading edge of threat prevention, they are likely to continue to be involuntary share donors in the security market.

I am not going to argue that Palo Alto is cheap per se. I will say this, though - if Palo Alto can grab 15% share of the enterprise network and endpoint security market in 2019 (and the market continues to grow at a mid to mid-high single-digit rate) and generate 30%+ FCF margins, a $180 fair value is not unreasonable. If the company can reach 20%, the target can move above $200.

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Strong Share Growth And Margins Fueling Palo Alto Networks

Seeking Alpha: Check Point Software Still On Point

I've liked Check Point Software (NASDAQ:CHKP) as a good risk-reward play on the IT security space for some time and the stock worked reasonably well since my last article. The roughly 20% appreciation since then absolutely pales next to the performances of other security firms like Palo Alto (NYSE:PANW) and Imperva (NYSE:IMPV) (which have more than doubled), as well as Fortinet (NASDAQ:FTNT) and FireEye (NASDAQ:FEYE), but relative to old school tech stocks like EMC (NYSE:EMC), Cisco (NASDAQ:CSCO), and Oracle (NYSE:ORCL), the comparison is more favorable to Check Point.

I continue to like Check Point as a Goldilocks tech stock, but I don't think it is significantly undervalued today. Mid-single digit long-term growth supports a fair value close to $80, but Check Point doesn't seem structured to generate the sort of absolute revenue growth or relative share growth that would support major reratings.

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Check Point Software Still On Point

Seeking Alpha: Check Point Software Offers A Good Risk-Reward Trade-Off

After a tough couple of years in which analysts and investors questioned whether Check Point Software Technologies (CHKP) could maintain its market share against more aggressive up-and-comers like Palo Alto Networks (PANW) and Fortinet (FTNT) and whether the company's prioritization of margin over share was the right strategy, 2013 was a good year for the shares. That momentum has been holding up of late, as although Check Point didn't have a great first quarter, the company has avoided a lot of the negativity that has hit Fortinet, Palo Alto, and FireEye (FEYE) recently.

As a stock, Check Point is a much different proposition than Palo Alto, FireEye, or Fortinet. This company isn't disrupting the market and isn't likely going to be growing revenue at a frequent annual double-digit rate. On the other hand, it has strong market share and a good margin and free cash flow base. I don't see the same overall upside to Check Point as its smaller rivals, but on a risk-adjusted basis, the return is still good enough to make this a worthwhile stock for less risk-tolerant investors.

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Check Point Software Offers A Good Risk-Reward Trade-Off

Seeking Alpha: Can Fortinet Deliver A One-Two Punch Of Growth With Higher Margins?

It's probably true of all industries to some extent, but the enterprise/network security business seems to be one where there's always some nagging detail for the companies. Check Point (CHKP) has fantastic margins, but hasn't always been quick to innovate and seems willing to cede margin to maintain share. Palo Alto (PANW) has a great sales effort, but sometimes seems to overstate its own capabilities. For Fortinet (FTNT), the challenge is pairing good revenue growth and share gains with strong margins, and judging by management's guidance that challenge will continue on at least another quarter.

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Can Fortinet Deliver A One-Two Punch Of Growth With Higher Margins?

Seeking Alpha: As Palo Alto Networks Disrupts The Market, More Gains Can Come

Next-gen security company Palo Alto Networks (PANW) certainly does not look all that cheap on backward-looking metrics like price/sales, but the company's share gain prospects and well above-average growth could lead to more price appreciation from here. Palo Alto already generates pretty solid free cash flow margins with less than 15% market share, and as the company looks to turn up the pressure on Cisco (CSCO) and Check Point (CHKP), margin leverage could move higher.

Certainly, there a lot of words like "could" and "potential" when it comes to Palo Alto. The company has built itself into a low-teens market share holder in the network security space, but Cisco, Check Point, Fortinet (FTNT) and the rest are not going to roll over. Likewise, there are ongoing concerns about the company's litigation with Juniper (JNPR), the direction of future network security threats and solutions, and the fundamental long-term profitability of the business. Expectations for Palo Alto are demanding, and the risk is above-average, but this still shapes up as a hybrid hardware/software company worth a closer look.

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As Palo Alto Networks Disrupts The Market, More Gains Can Come