Comparing FireEye Inc (NASDAQ:FEYE) and Check Point Software Technologies Ltd. (NASDAQ:CHKP) side by side, an investor might wonder which is the better buy: FEYE stock or CHKP stock?

It’s not a trick question. 

Relatively speaking, Check Point is clearly a better IT security stock than FireEye. At least that’s the case if we’re talking about profits and losses. But these are two companies at different stages.

In the trailing 12 months, Check Point made $861 million in operating income from $1.8 billion in revenue while FireEye had $360 million in operating losses from $720 million in revenue.

Check Point’s completed its transformation to a recurring-revenue model that began in earnest a couple of years ago; FireEye’s is just getting going, a point InvestorPlace.com’s James Brumley made abundantly clear on July 3:

“As underestimated as FireEye’s new model may be, it will be years before it actually bears enough fruit to pay all of the company’s bills. FEYE stock will surely rise and fall between now and then. If you can stomach the volatility though — and remain well aware that FireEye is still only a trade that is morphing into an investment — you can afford to lean bullishly.”

Revisiting the Value Trap

It’s taken a while for me to come to appreciate the positive aspects of FireEye’s business. As recently as January, I called FEYE stock a “value trap”, suggesting investors take a look at Cyberark Software Ltd (NASDAQ:CYBR), a smaller, Israeli IT security business with solid profits and growing revenues. Since then, CYBR is down more than 16% in the last six months while FEYE is up 17.9% over the same period. 

As cyber-security stocks go, I still like CYBR, but that’s a discussion for another day. Right now, I’m trying to help you determine which is the better buy between the large cap (Check Point) and the mid cap (FireEye).

As I said in June, I believe FEYE stock has a good chance of hitting $20 by June 2018. However, to get to $20, it’s got to keep working on cutting expenses while growing the top line at a reasonable pace. To wit: “Candidly, if it wants to make money, that number [overall gross margin] has to jump to 80%; it’s got to boost subscription and services’ quarterly revenue by 20% or more year over year and cut another 10% from its operating expenses,” I wrote. “Then it will start making money.”

Operating Margin Keeps Getting Better

In Q1 2017, FireEye’s overall gross margin (GAAP) was 63%; its subscription and services revenue grew by almost 12%, and operating expenses dropped 28.5%.

In that first quarter announcement, FireEye said its non-GAAP operating margin in the second quarter would be between -9% and -10%; in Q2 2016 it was -28%, almost 32% lower than in the same quarter in Q2 2015.

So, it’s operating margin’s gone from negative 42% to negative 9% in the course of eight quarters. Extrapolate that over the next eight quarters, and it’s hard to imagine it won’t be making money.

Is FEYE Stock The Better Buy?

Over the past two fiscal years, Check Point’s revenues have risen by 16.4% while operating income’s increased by just 6.3%.

Meanwhile, FireEye’s revenues have increased by 67.8% while operating margins have gotten much better, albeit still in the red.

My inclination would be to buy both FEYE stock and CHKP. One for growth and one for stability. However, I might wait until after FireEye reports its Q2 2017 results on August 1. Investors will be watching to see how subscription and services revenues are growing. If it’s not by double digits, all bets are off when it comes to FireEye.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.