3 Cybersecurity Stocks Evercore Just Initiated On

In separate reports published Tuesday, Evercore ISI analyst Matthew Williams initiated coverage on three cybersecurity stocks: Check Point Software Technologies Ltd. CHKP, FireEye Inc FEYE and Palo Alto Networks Inc PANW.

Check Point: Great Business, Threat Of Competitive Pressures Limits Upside

Williams initiated coverage of Check Point Software Technologies with a Hold rating and $91 price target.

According to Williams, Check Point's business model features a high degree of recurring subscription and maintenance revenue generates an industry-leading profitability and strong cash flow. In addition to the strong cash flow, the company's buyback program supports the stock's valuation at a time when it is ramping investments across the business to pursue "meaningful" growth opportunities.

"We believe Check Point's decision to step up investment in R&D and sales & marketing (likely a 300 bps hit to margins in FY15) is a prudent approach as the market opportunity remains compelling, but expect that any material leverage is likely some quarters away," Williams wrote.

Williams also noted that Check Point is "increasingly" under pressure (but responding) from its peers in the firewall market (including Palo Alto Networks and Fortinet Inc FTNT. As such, the analyst concluded "we find it hard" to value shares of Check Point with a superior valuation until there is more certainty that the company's strategy is paying off.

FireEye: ‘Next Generation' Security

Williams initiated coverage of FireEye with a Buy rating and $50 price target.

Williams noted that shares of FireEye have rebounded following a "challenging" back half of 2014 and still have room to move higher as the Mandiant acquisition is now fully integrated.

Williams continued that there remains some "consternation" around FireEye's investment spending and positive cash flow and operating income are not expected until fiscal 2017 and fiscal 2018, respectively. However, strong billings (up 52.8 percent year-over-year at Q1) and subscription (up 146 percent year-over-year) growth gives "confidence" that there is leverage in the business as the model scales.

Williams further estimated renewal billings could accelerate as a percentage of total subscription billings to 40 percent in fiscal 2017 from 25 percent in fiscal 2015 and that the "net new" billings growth rate required to meet the analyst's estimates falls to 23 percent in fiscal 2017 from 26 percent in fiscal 2016.

"The company is approximately 30 percent penetrated in the Global 2K (50 percent in F500), which speaks to the growth opportunity at the high end of the market, in our view," Williams wrote. "Follow on sales in 2014 nearly approximated new product/subscription sales, and we believe the company is well positioned from a product and mindshare perspective to capitalize on this opportunity."

Palo Alto: ‘Premium' Valuation Unattractive

Williams initiated coverage of Palo Alto Networks with a Hold rating and $174 price target, mostly due to valuation reasons.

According to Williams, Palo Alto is a "meaningful disruptor" within the enterprise firewall market and he remains "constructive" on the company's growth prospects, growing subscription offerings and revenue base. Moreover, the company clearly believes that "platform wins" in cybersecurity and offerings beyond the core firewall helps solidify its reputation with customers.

However, Williams argued that the company's disruptor status and reputation with clients is already reflected in the stocks' valuation at 10x EV/CY 16 Sales.

"International accounted for 33 percent of TTM revenue, and we continue to see considerable upside for Palo Alto going forward," Williams wrote. "However, with competitive partner channels already in place and at scale, we believe some conservatism may be warranted with the stock trading at a premium multiple to the group."