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Don't Get Greedy Yet With Check Point Software Technologies Stock

By Nicholas Rossolillo - May 26, 2018 at 2:03PM

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It's been a rough year, but the company's fortunes could be about to change.

Shares of cybersecurity outfit Check Point Software Technologies (CHKP) have been underperforming for the past year. As cyberattacks have gained notoriety, lots of competition has cropped up and taken a bite out of the company's market share. Even with an attractive valuation, it may not be time yet for investors to double down on Check Point as the business gets serious about marketing new security tools.

Making a key transition

During the first quarter of 2018, Check Point's revenue only rose 4% year over year. Meanwhile, younger competitor Palo Alto Networks (PANW) has been growing sales by double digits with aggressive marketing and newer technology.

CHKP Revenue (TTM) Chart

Data by YCharts.

The silver lining here is that the better-established Check Point is a profitable company, whereas upstarts like Palo Alto Networks are not. In spite of lackluster revenue, Check Point's earnings per share increased 7% year over year, helped by the company's share repurchase program. A switch to cloud-based recurring revenue streams has also been under way, which is helping push down the cost of sales and enabling more investment into research and marketing. Security subscription revenue grew 14% last quarter and represented only 28% of total revenue, so there is much that can be improved on here.

To that end, Check Point launched a new holistic "Gen V" security offering that helps organizations stay secure against older types of threats as well as newer, more complex attacks all in a single package. Management said many of its smaller competitors only protect against niche threats, something it views as inferior to its offering. Because of the scope of coverage, Gen V deals are bigger and income from them typically lasts longer, but they are also slower to ink.

An illustration of multiple computers getting hooked up to a central cloud-based network.

Image source: Getty Images.

Because of sluggish growth, investors have lost enthusiasm for the stock. After months of declines that started during the summer of 2017, its trailing price-to-earnings ratio sits at 20. Price to free cash flow, which adjusts earnings to only reflect money left over after basic operations are paid for, is a lowly 13.9. With the cybersecurity industry growing and Check Point launching new product and sales campaigns, that makes the stock look like a pretty cheap buy.

Time to get greedy?

While Check Point is executing on a turnaround that could lead to stronger growth, it might be too soon to get greedy. Management was pleased with its early progress, but admitted that pushing its new solutions and retraining its sales force is taking longer than it would like. Thus, full-year 2018 revenue guidance was downgraded to $1.85 billion to $1.93 billion from an estimate of $1.9 billion to $2.0 billion. That would be flat to a 4% increase over 2017, hardly the sales momentum investors may have been looking for. Adjusted earnings are expected to be 2% to 8% higher, a big slowdown from the 13% gain last year.

Shares look cheap, but with both the top and bottom lines decelerating, there could be further declines. I am waiting to see if the recent trend continues to deteriorate and pushesCheck Point's revenue into contraction. If it reverses and sales accelerate again, I'm a buyer. But until the cybersecurity company can recapture sales growth and start pushing back against its newer competition, getting greedy doesn't seem like the right move.

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