Cyber attacks are on the rise and cost business owners trillions of dollars every year. As cyber attackers get smarter and more businesses find themselves vulnerable, they need cybersecurity software and experts to keep their information safe. Any data leak can ruin customer trust, and the legal fees can add up quickly for companies that endure data breaches.
The rising demand for cybersecurity solutions has enabled several cybersecurity companies to command multi-billion dollar valuations. The high-flying stocks in this industry often have high revenue growth but suffer from unprofitable operations. Finding undervalued cybersecurity stocks isn’t easy since the industry is dominated by high growth rates, negative profit margins, and high valuations. However, a few cybersecurity stocks have upside and reasonable valuations.
You won’t find cybersecurity stocks valued like banks, but there are some good opportunities that mix growth and value. These three undervalued cybersecurity stocks offer great starting points.
Palo Alto Networks (PANW)
Palo Alto Networks (NASDAQ:PANW) is a high-growth cybersecurity company that has recently become profitable. The company reported its first profitable quarter in August 2022 with a net income of $3.3 million, breaking a four-year stretch of unprofitable quarters.
Since that initial success, the company’s revenue and profits have grown. The company started 2023 by reporting a net income of $107.8 million, a significant increase from its previous level. Profit margins have expanded from 0.21% to 6.26%, showing the company’s efforts have been paying off. Revenue has continued to grow along the way, with 20%+ year-over-year revenue growth throughout the company’s fiscal 2023.
The stock currently carries an uninspiring P/E ratio that hovers close to 400. However, the forward P/E ratio gives a more optimistic portrayal of the company, ticking in at a little above 50. With many opportunities to reduce its P/E ratio, especially in the next quarter, Palo Alto Networks is in a position to comfortably exceed $3.3 million in the next earnings report and bring down the P/E ratio. The company still exhibits strong top-line growth, and profitability is finally coming together.
Fortinet (NASDAQ:FTNT) recently reported its service revenue grew by 30.5% year-over-year revenue growth, totaling $761.6 million. This is the first time the company crossed this milestone with service revenue in over six years. Product revenue came in at $500.7 million in the most recent quarter, representing a 35.0% year-over-year increase. The company has achieved overall revenue growth above 30% year-over-year in recent quarters, but seeing this type of growth for services revenue and product revenue is encouraging. Fortinet’s total revenue for Q1 was $1.26 billion.
The company’s Founder, Chairman, and CEO, Ken Xie, mentioned in the press release that more companies are using FortiOS and custom ASIC technology to achieve better cybersecurity at lower costs. Growing demand should strengthen top-line results.
Many cybersecurity stocks with high revenue growth tend to be unprofitable, but Fortinet is an exception. The company reported a 19.62% profit margin in the most recent quarter on the back of an 81% year-over-year increase in GAAP operating income. The company also has free cash flow of $647.2 million. The balance sheet is solid, and high top and bottom line growth can make the stock a bargain. Fortinet currently has a P/E ratio of 62 and a forward P/E ratio of 51.
Check Point Software Technologies (CHKP)
Check Point Software Technologies (NASDAQ:CHKP) is a cybersecurity company with attractive profit margins above 30% over the past four quarters. Check Point also beat its Q1 guidance for revenue and earnings. The company recently reported that Q1 revenue came in at $566 million, $1 million above the midpoint. Similarly, the stock’s EPS exceeded the $1.73 midpoint by $0.07 coming in at $1.80. The stock has a P/E ratio under 20 and a market cap above $15 billion.
Check Point is a profitable, undervalued cybersecurity stock, but it has a lower ceiling than the other cybersecurity stocks on this list. The company only grew its revenue by 8% from FY 2021 to FY 2022. The low revenue growth partially explains why the stock’s price has been flat year-to-date and gained less than 30% over the past five years. The company only grew its net income by 8.68% in the most recent quarter, and single-digit income growth is the norm for this company. Check Point Software Technologies is more of a value stock than a growth stock.
On this date of publication, Marc Guberti held a long position in FTNT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.