Though its stock price jumped about 4.4% since the company announced yet another solid quarter on Oct. 31, Check Point (CHKP 1.74%) shares have since eased. In fact, some industry pundits have even lowered their already muted expectations for Check Point, suggesting that "intensifying competition and an uncertain macroeconomic environment add to its [Check Point's] woes."
The Street's negativity toward Check Point is nothing new. Unlike its peers including Palo Alto Networks (PANW 3.05%) and Fortinet (FTNT 2.00%), among others, Check Point doesn't wow pundits with 30% or more top-line growth each quarter.
CEO Gil Shwed is a bit old-fashioned: He manages Check Point with an eye toward growing its bottom line, not spending indiscriminately to push sales at the expense of profitability. With that in mind, here are a few things that make Check Point worthy of consideration.
Image source: Check Point Software.
Building a foundation
Check Point isn't alone in its effort to establish a consistent, ongoing stream of recurring revenue, which it accomplishes by selling its software-blade -- or data security modules -- subscriptions. And Check Point's growing annual recurring revenue is having a positive impact on earnings per share (EPS), before and after factoring in one-time expenses. Notably, the same cannot be said of Palo Alto Networks and others.
Last quarter's $427.6 million in sales was "just" a 6% improvement over 2015's third quarter. To put that into perspective, Palo Alto Networks reported a 41% increase in sales a quarter ago, to $400.8 million, and is expecting over 30% year-over-year improvement this quarter. That's where many investors and analysts seem to stop in comparing the two industry stalwarts.
But a closer look reveals that Check Point's $98.6 million in subscription sales in the third quarter was an impressive 24% jump from a year ago, and combined with the company's updates and maintenance revenue of $192 million, equaled 68% of total sales. That's a solid foundation for a consistent, reliable source of revenue, and it's growing.
Frugal is good
Due in large part to a boost in expenses related to growing its software-blade recurring-revenue sales efforts, Check Point saw total operating expenses climb to $221 million in its third quarter, representing 52% of its total revenue. For Shwed and team, that's akin to a Check Point spending spree, but a well-conceived one, given the long-term upsides of growing recurring revenue.
By comparison, Palo Alto's overhead of $344.5 million last quarter equaled 86% of its $400.8 million in revenue. And there's little doubt that expenses as a percentage of revenue will be in a similar sky-high range when Palo Alto reports fiscal 2017 first-quarter results after the close Nov. 21.
Yet Palo Alto stock is a consensus buy, with an average target price of $180.89 a share, or 13% above current levels. Check Point? Its stock is rated a hold, with a share price expected to climb less than 1%, to $84.11. Apparently, growing EPS 7% year over year including expenses -- as Check Point did last quarter, above its 6% revenue gain -- takes a back seat to revenue growth of over 30% at the expense of profitability, as is the case with Palo Alto.
When it's right, it's right
Check Point is not an appropriate investment alternative for everyone -- nor is any one stock, for that matter. Some investors and pundits have made abundantly clear their belief that what matters is double-digit revenue growth, regardless of how it's accomplished.
Last quarter's ho-hum reaction to beating revenue target of $423 million and EPS guidance of $1.08 excluding one-time costs -- Check Point reported $1.13 -- says more about the Street than it does about Shwed and team. Even so, Check Point fills an investment niche its peers don't: a consistent, relatively predictable stock for investors who appreciate growing profitability.
Even investors whose tolerance for risk is slightly higher than that of their conservative peers should give Check Point a good look. Almost every portfolio can benefit from at least one or two stocks that deliver bottom-line results quarter in and quarter out, and that describes Check Point to a T.
