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Why Check Point Software Stock Dropped 8% Today

By Rich Smith – Apr 18, 2019 at 1:26PM

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Earnings beat, guidance doesn't.

What happened

Shares of IT security specialist Check Point Software Technologies (CHKP 0.49%) plunged more than 11% in early trading on the Nasdaq today before retracing to about an 8.2% loss as of 12:40 p.m. EDT. Check Point reported its fiscal first-quarter 2019 earnings this morning, but earnings weren't the problem this time -- guidance was.

Stock chart with red arrow and black bars going up first, then down

An earnings beat could have sent Check Point stock up today. Instead, weak guidance is sending it down. Image source: Getty Images.

So what

Using GAAP, Check Point earned $1.15 per share in Q1. That was a penny below what the company had earned in Q1 2018. However, pro forma profits for the quarter came in at $1.32 per share, versus the $1.31 per share that Wall Street analysts had predicted -- an "earnings beat."

Quarterly sales of $471.8 million likewise edged out analyst estimates and were up 4% year over year. Security subscriptions grew 13% year over year.

Now what

But again, that wasn't the problem. The problem was that after reporting its earnings beat, Check Point proceeded to give new guidance  for the second quarter of 2019, currently under way. Management says it expects to earn between $1.32 and $1.40 per share this quarter, on sales of $474 million to $500 million.

When taken at their midpoints, these projections suggest pro forma profit of only $1.36 per share on sales of $487 million. And while that sales number would meet Wall Street's estimate for Check Point in Q2, the earnings number would fall $0.02 short of the $1.38 per share that Wall Street wants to see Check Point earn.

Thus, what we're looking at here is a case of an "earnings beat" undermined by a "guidance miss." Unfortunately, it seems that investors today are emphasizing the latter and ignoring the former.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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