Check Point Trouncing Palo Alto as Investors Dump Growth Stocks

  • Slowdown in security spending has punished high valuations
  • Palo Alto down 21% year to date despite bullish analyst calls

Check Point Software Technologies Ltd., the world’s top firewall provider, grew at a fraction of the pace of its upstart rival, Palo Alto Networks Inc. last year. In today’s stock market, that’s a plus.

Shares of Check Point are up 4.4 percent this year, while Palo Alto, which went public in 2012, has lost 21 percent, dragged down by a selloff in high-growth stocks.

Palo Alto, co-founded by former Check Point engineer Nir Zuk, has been one of the biggest winners in the security spending boom. It rallied more than 300 percent through the end of 2015 as data breaches at companies such as JPMorgan Chase & Co. and Home Depot Inc. spurred firms to beef up spending on cyber-safety measures. The advance started to fade in December as global economic weakness roiled markets, and the stock tumbled last week after Palo Alto said revenue growth slowed from the prior quarter, confirming investor concern the spending boom has peaked.

“Falling off from peak rates of growth in security has had a big impact on the highest-multiple security stocks,” said Michael Turits, an analyst with Raymond James & Associates Inc. in New York. “That combined with the general shift towards value from growth in the market has hurt the stock performance for Palo Alto relative to Check Point.”

Most analysts disagree with the market’s mood. Of 40 firms covering Palo Alto, 35 still recommend buying the shares, while less than half of the 33 following Check Point are bullish on the stock, according to data compiled by Bloomberg.

Palo Alto’s sales are forecast to grow 47 percent to $1.37 billion this year, down from 55 percent in 2015. Check Point’s revenue will expand 7 percent to $1.75 billion, compared with 9 percent in 2015, according to the median of analyst estimates.

“Even if the performance to date has been worse for higher-growth names, our view is that over the next 12 months it will be stronger,” said Turits, who has a buy rating on Palo Alto and a neutral recommendation on Check Point.

Check Point, which has the highest operating margins in the industry, started using some of that cash to increase sales and marketing efforts last year.

Check Point’s “robust solutions” and efforts to improve marketing will keep competitors at bay, Chief Executive Officer Gil Shwed said in an interview with Bloomberg News in April.

Spokespersons at Check Point in Tel Aviv and Santa Clara, California-based Palo Alto didn’t respond to e-mailed requests for comment.

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