Analysts Very Cautious on Security Software Stocks: Just 2 to Buy Now

Palo Alto Networks

This was a momentum trader’s dream a few years ago, before coming back to earth. Palo Alto Networks Inc. (NASDAQ: PANW) develops and sells network security gear, dubbed Next-Generation Firewalls, that protect customers’ networks with the ability to read the content of the traffic (not only its address) and make decisions based on the type of application and a set of access policies.

Palo Alto Networks offers parallel processing of security functions, while some of its competitors offer serial processing mechanisms, which result in a degradation of throughput or speed of the network.

Some on Wall Street see upside to estimates from better salesforce execution and the install base refresh cycle. Deutsche Bank notes that checks on the company were the most constructive of all the firewall vendors, and the firm does not see material downside risk into the earnings, which are scheduled for November 20. The analysts noted this in the research as a potential issue:

Palo Alto customers seen trading down on appliance refresh resulting in smaller deal sizes. In particular, one reseller cited a trade-down from the company’s big 7050 appliance (a pair of which can cost $1.7 million according to this check) to the new 5260 appliance. Apparently, the 5260 appliance can meet customer throughput requirements in many cases but at a significantly lower post-discount average selling price.

Deutsche Bank’s $160 price objective accompanies a Hold rating and is in line with the consensus target of $160.74. Shares were trading at $136.80.

Check Point Software Technologies

This stock was hit hard when the company posted results in late October. Check Point Software Technologies Ltd. (NASDAQ: CHKP) provides network security solutions, selling software, hardware and subscription services for IT security, with a focus of reducing complexity of security management. Its hardware is based on a software blade architecture that allows for multiple security functions to be run concurrently.

Check Point sells its solutions to service providers, small and medium-sized businesses, consumers and enterprises, including all the Fortune 100 companies. This long-time industry leader used to be a must-own stock for tech portfolios, but it has encountered some issues, which Deutsche Bank noted:

Check Point used to be on autopilot, making its quarters like clockwork. This is no longer the case, and one check claimed that sales rep turnover is starting to pick up a bit now that they’ve entered a slower growth and tougher environment. Given the company’s admission of sales execution issues as it ramped sales rep growth, this comment made us wonder whether some of the “sales execution” challenges could be turnover-related.

The Deutsche Bank price target is $114. The consensus target is $110.10, and shares traded at $102.50.

Clearly the tables in the industry have turned some, so Deutsche Bank is playing it pretty safe. All these companies remain leaders in the sector and are solid stocks to consider for the long term, especially on a pullback.