Cybersecurity is one of the secular investment themes for the next decade. The industry has been receiving much attention from investors. Cybersecurity stocks have solid gains, with the First Trust NASDAQ Cybersecurity (NASDAQ:CIBR) up over 16% year-to-date.
In addition to broad-based gains, individual stocks have fared much better. Stocks like Palo Alto Networks (NASDAQ:PANW) are up 56% as of this writing. Given the massive appreciation YTD, it pays to be selective. Otherwise, paying too much, even for the best cybersecurity stocks, can lead to underperformance.
Overall, cybersecurity remains a compelling long-term investment as cyber threat prevalence increases. More advanced tools are needed to defend digital systems and networks against increasingly sophisticated attacks. Due to the critical nature of cybersecurity, the category will grow faster than other software categories.
While faster-growing cybersecurity stocks are frothy, their lower-growth peers are trading at discounted valuations. As a result, they have a better risk-reward profile. These are solid companies with excellent cash flows and strong margins at a reasonable valuation.
Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) has had a rough August after reporting earnings on August 3. An unexpected guidance cut led to a more than 20% decline. However, the selloff presents an opportunity for investors.
Fortinet is one of the leaders in the cybersecurity industry. It has a stronghold in the enterprise market due to its comprehensive suite of security solutions. It offers secure networking solutions, including firewalls, software-defined wide area network (SD-WAN), and secure access service edge (SASE). Additionally, it provides zero-trust access solutions and cloud security.
It offers the perfect blend of growth and profitability in the cybersecurity industry. The company has been riding the cyber spending tailwind for several years. And it has been keeping up with faster-growing peers like CrowdStrike (NASDAQ:CRWD). Revenues grew 28% and 32% in 2021 and 2022, respectively.
At the same time, the company has maintained some of the best profitability levels. It has delivered best-in-class operating and free cash flow margins. For instance, operating margins have been above 26% in the last four quarters.
While the recent quarter was a bit disappointing, the outlook for Fortinet is still bright. It will grow revenues by at least 20% in 2023. Moreover, margins are expected to expand 100 basis points annually and free cash flow will grow 20% annually.
As of this writing, FTNT stock is one of the cybersecurity stocks to buy. TipRanks analysts agree with the average price target of $77, representing a 29% upside.
Gen Digital (GEN)
Gen Digital (NASDAQ:GEN) is somewhat of an obscure name in the industry. However, you might know its popular products, such as Norton, Avast, LifeLock, Avira, and AVG. The company was formed after Norton LifeLock’s merger with Avast in September 2022.
After the merger, Gen Digital has achieved tremendous scale. It now has 65 million premium subscribers and hundreds of millions of free users. In terms of global scale, its products are available and used in over 150 countries.
Recent results highlighted the firm’s progress to its commitment of $3 annual EPS. Revenue growth, including Avast’s historical results, was 2%. This was the sixteenth consecutive quarter of growth.
Operating income growth was impressive, rising 43% year-over-year to $545 million. In terms of margins, the company is extracting cost synergies from the merger. As a result, operating margins were up 390 basis points to 57.6%. From the results, the firm will likely achieve margins above 60%, as outlined in its long-term model.
With such high levels of profitability, the company will return more capital to shareholders. Since the merger, it has spent $650 million on buybacks and $350 million on quarterly dividends. Management expects to maintain this capital deployment plan.
For FY2024, management expects non-GAAP EPS of $1.95 to $2.02. Thus, as of this writing, GEN stock is one of the cheapest cybersecurity stocks. At a forward price-to-earnings of 10, it’s a bargain stock that will reward patient investors.
Check Point Software (CHKP)
This Israel-based security is a bargain amid a frothy technology sector. With cybersecurity threats surging, Check Point Software (NASDAQ:CHKP) is a way to play this secular theme.
Due to the current macroeconomic backdrop, enterprises seek a one-stop solution for all cybersecurity needs. Check Point provides secure access and protection in the cloud, network, and for remote users.
The company is working to enhance its unified security solution. That’s why they acquired Perimeter 81 for $490M on August 10. Perimeter 81 provides cloud and on-device protection for remote users. Check Point hopes to capitalize on and integrate Perimeter capabilities to benefit as more data is accessed remotely.
Financial results have been impressive, with solid subscription revenue growth driven by their Infinity platform. As second quarter FY2023 results showed, advanced solutions like CloudGuard, ThreatCloud AI, and Harmony E-mail are gaining traction, boosting subscription revenues. Security subscription revenues increased by 14% YOY, and management expects more growth in the second half.
In terms of profits, non-GAAP net income was $238 million, a 14% growth YOY. The company repurchased 2.6 million shares for $325 million. These repurchases were accretive, leading to a higher non-GAAP EPS growth of 22%.
Management reiterated their guidance calling for revenues to be between $2.34 billion to $2.51 billion for the year. Additionally, they expect non-GAAP EPS to range between $7.70 to $8.30. Based on this outlook, its forward P/E is 17 and thus one of the undervalued cybersecurity stocks to buy.
CHKP stock has also had some positive commentary from analysts. Recently, Wedbush maintained an “outperform” rating on the stock and raised the price target to 150. They cited the strong quarter, growth initiatives and cost discipline as their reasons for optimism.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.