Unprecedented cyber criminality and increased risk exposure have driven a significant increase in cyber security spending by business enterprises. The increasing need for privacy-related solutions has fostered a strong business environment for cybersecurity providers Radware (RDWR) and Proofpoint (PFPT). But let’s find out which of these stocks is a better buy now.
Radware Ltd. (RDWR) and Proofpoint, Inc. (PFPT) are cybersecurity and cloud security solutions providers that operate worldwide. Based in Tel Aviv, Israel, RDWR provides security updates subscriptions, a real-time network attack mitigation device, and cyber-command and control applications, among other cloud protection services. U.S.-based PFPT offers protection against advanced and targeted threats, security optimized cloud architecture solutions, and integrated email security solutions.
Society’s growing dependency on digital tools has increased the frequency and intensity of cybercrime activities, such as phishing scams, malware attacks, and hacking campaigns. In response, businesses and organizations worldwide have been channeling more spending into advanced cybersecurity technologies to defend their critical, in-house security infrastructure. The desire to protect valuable client data from sophisticated cyberattacks has driven higher demand for cybersecurity solutions providers like RDWR and PFPT.
Click here to checkout our Cybersecurity Industry Report for 2021
Over the past year, RDWR has gained 24.7%, while PFPT has returned 44.1%. In terms of their past month’s performance, PFPT is the clear winner with 34.6% gains versus RDWR’s 8% returns. But which of these stocks is a better pick now? Let’s find out.
On April 29, RDWR and Netsync teamed up to provide RDWR’s Cloud DDoS Protection Service to state, local and education (SLED) agencies in the United States as part of Netsync’s offerings. The collaboration will allow RDWR to offer the widest security coverage with zero-day DDoS attack protection to its customers.
Also in April, Guangqi Honda, a renowned automobile enterprise, selected RDWR’s Cloud Native Protector Service to provide cloud security support for its network construction and business operations. RDWR’s advanced threat detection capabilities should enable it to cater to all the customer’s needs.
This month, law firm Brodsky & Smith, LLC, Rigrodsky Law, P.A., and several other law firms launched an investigation of the Board of Directors of PFPT for potential breaches of fiduciary duties relating to its sale to Thoma Bravo and other alleged violations of its shareholders. This month, PFPT agreed to be acquired by Thoma Bravo, a private equity investment firm, in a $12.3 billion transaction. The company believes that it can be more agile and continue investing in innovation upon completion of the transaction.
Recent Financial Results
In the fourth quarter ended December 31, 2020, RDWR’s revenues from its EMEA segment increased 17% year-over-year to $24.2 million. The company’s revenues from the Asia-Pacific region rose 2% from the prior-year quarter to $17.4 million. It reported $2.8 million in non-GAAP net income and earnings per share of $0.21. RDWR’s gross profit increased 2.75% from the year-ago value to $56.86 million. Also, its net cash provided by operating activities rose 306.1% year-over-year to $16.08 million.
In the first quarter ended March 31, 2020, PFPT reported $287.8 million in revenues, , representing a 15% increase year-over-year. Its gross profit rose 18.5% year-over-year to $214.31 million. However, the company reported a $42.06 million operating loss and a net loss of $45.32 million. Its loss per share came in at $0.79.
Past and Expected Financial Performance
RDWR’s revenue has increased at a 5.8% CAGR over the past three years. In comparison, PFPT’s revenue grew at a 24.3% annualized rate over this period. Also, RDWR’s levered free cash flow has increased at a 26.7% CAGR over the past three years, while the PFPT’s levered free cash flow CAGR rose 20.1% over this period.
RDWR’s revenue is expected to increase 11% in the next quarter ending June 30, and 9.1% next year. Consensus EPS estimates indicate a 7.7% increase in the next quarter, and 7.8% in the current year. In contrast, analysts expect PFPT’s revenue to increase 17.2% in the next quarter and 17.9% in 2022. Also, the company’s EPS is estimated to decline 10.2% in the next quarter and increase 1.5% in the current year.
PFPT’s trailing-12-month revenue is more than four times RDWR’s. But RDWR is more profitable, with an 82% gross profit margin versus PFPT’s 74.3%.
Furthermore, RDWR’s ROE and ROA of 2.5% and 0.6%, respectively, compare favorably with PFPT’s negative returns.
In terms of trailing-12-month Price/Sales, PFPT is currently trading at 9.09x, 72.2% higher than RDWR, which is currently trading at 5.28x. Also, its 8.36x forward EV/Sales is 128.4% higher than RDWR’s 3.66x.
PFPT is also more expensive both in terms of forward EV/Sales (49.64x versus 24.68x) and trailing-12-month Price/Cash flow (36.95x versus 20.28x).
So, RDWR is the more affordable stock here.
RDWR has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, PFPT has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Quality Grade, RDWR has an A, given its higher-than-industry gross profit margin. But PFPT’s Quality Grade of C is reflective of its lower-than-industry EBIT margin.
Also, in terms of Growth Grade, both RDWR and PFPT have a B, which is consistent with their earnings and revenue growth.
Both RDWR and PFPT have a C Momentum grade, which is consistent with their moderate price returns over the past year.
Among 23 stocks in the D-rated Software – Security industry, RDWR is ranked #3 while PFPT is ranked #7.
Beyond what we’ve highlighted, our POWR Ratings system has also rated RDWR and PFPT for Quality, Stability, and Growth. Get all RDWR ratings here. Also, click here to see the additional POWR Ratings for PFPT.
RDWR and PFPT are good long-term investments because the demand for cybersecurity products is on the rise, given the perilous online threat landscape. But RDWR appears to be a better buy based on the factors discussed here. Although PFPT has witnessed solid growth in subscription revenues, we think RDWR’s superior financials, higher profitability, and relative undervaluation make it a better investment option.
Click here to checkout our Cybersecurity Industry Report for 2021
PFPT shares were trading at $172.00 per share on Friday morning, down $0.00 (0.00%). Year-to-date, PFPT has gained 26.09%, versus a 12.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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