Palo Alto Networks Gains as Investors Abandon Check Point

Palo Alto Networks Inc., the newly-public data security provider, is growing at the expense of older and larger rival Check Point Software Technologies Ltd.

Palo Alto raised the share price in a secondary offering to $63 apiece from $61.61 earlier this week, according to a regulatory filing yesterday. Meanwhile, Check Point shares plunged 13 percent yesterday to a two-year low after third-quarter billings dropped.

The companies -- and stocks -- are headed in opposite directions as growth in cloud computing and smartphone usage alters the types of security threats businesses face. Founded in 2005, Palo Alto has focused from on the newer applications companies are using and it developed technology to defend against more sophisticated threats, while Check Point, almost two decades old, still delivers traditional firewalls.

“It’s a paradigm shift for network security,” said Jonathan Ho, an analyst at William Blair & Co. in Chicago, who rates both stocks outperform. Palo Alto has “really been the one to lead the charge,” he said.

Check Point, based in Tel Aviv, Israel, said yesterday that competition is strong.

“I think we’ve done pretty well,” Check Point Chief Executive Officer Gil Shwed said during the third-quarter conference call yesterday. “We’ve been displacing Palo Alto in some places already, which is not a good indicator for a young emerging company.”

Slower Growth

While Check Point’s revenue is more than four times sales at Palo Alto, growth at the older company is slower. Check Point sales rose 7.8 percent to $332 million in the third quarter and billings dropped 1 percent.

Palo Alto, based in Santa Clara, California, said last month that fiscal fourth-quarter revenue surged 88 percent to $75.6 million, as the company sold to more than 9,000 customers in over 100 countries. It’s won business by delivering products to companies adopting new technologies around virtualization, software-as-a-service and mobile devices.

In the three months since its trading debut, Palo Alto’s market value climbed 56 percent to $4.5 billion through yesterday, while Check Point’s has dropped 18 percent during that stretch to $8.5 billion. Palo Alto declined 4.9 percent to $62.30 at 10:53 a.m. in New York, while Checkpoint dipped less than 1 percent to $40.99.

The rivalry is deep. Palo Alto co-founder and Chief Technology Officer Nir Zuk, worked as an engineer at Check Point from 1994 to 1999. He’s been in the security industry ever since, starting OneSecure Inc., which was acquired by NetScreen Technologies Inc. and then Juniper Networks Inc. He was chief security technologist at Juniper before starting Palo Alto.

Competitors Gain

Just two of the seven companies Palo Alto lists in its prospectus as competitors gained value this year -- Cisco Systems Inc. and International Business Machines Corp. Fortinet Inc., one of the companies listed, plunged 19 percent yesterday after predicting fourth-quarter results that trailed analysts’ estimates.

Robert Breza, an analyst at RBC Capital Markets in Minneapolis, downgraded Check Point and Fortinet in recent weeks to sector perform from outperform because of increased competition and lower pricing.

Bigger competitors like Cisco and Juniper are dropping prices to “try to hang onto their existing customer bases” Breza said in an interview. “It’s a highly fragmented market.”

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