Check Point Software Technologies (CHKP 0.55%) released uninspiring fourth-quarter results, and management expects low-single-digit revenue growth to continue in 2020. But the cybersecurity specialist's performance could improve in the medium term thanks to its cloud business.
Cloud vs. legacy cybersecurity
According to a study from Mordor Intelligence, the cybersecurity market Check Point addresses is poised to grow 14.5% annually by 2025. In comparison, the company's recent results look much less exciting. During the fourth quarter, revenue increased by only 3.5% year over year to $543.8 million. And because its research and development and sales and marketing expenses grew faster than revenue, operating income even decreased by 0.4%. In addition, the outlook doesn't show any sign of acceleration: Based on the midpoint of guidance, management expects revenue to increase by 2.8% in 2020.
That growth rate looks even weaker when compared to some cloud-based security players. For instance, the endpoint security company CrowdStrike and the identity management specialist Okta grew their last-quarter revenue by 98% and 45%, respectively, compared to last year.
Behind these flattish results, the details reveal a contrasted situation. The company's products and licenses segment, which includes revenue from legacy firewalls and gateways that protect on-premises computing infrastructures, declined to $157.9 million, down 1.7% year over year. But security subscriptions, which include cloud-based cybersecurity solutions and software attached to legacy products, more than offset that decline with $163.7 million of revenue, up 11.6% year over year. The company's most recent offerings, such as CloudGuard (cloud-based solutions that protect against advanced threats) and Infinity (a unified platform for cybersecurity across all networks and clouds), contributed to the strong growth of subscriptions.
Besides these two segments, Check Point's software updates and maintenance business, which partly depends on the company's products and licenses segment, still represents an important part of total revenue with $222.2 million during the last quarter.
Thus, given their relatively large contribution to total revenue, legacy businesses will keep on offsetting the higher growth of Check Point's cloud-based activities over the next several quarters.
Revenue growth acceleration over the medium term
The way subscriptions are recognized as revenue also contributes to the company's low revenue growth. When selling hardware that will run over several years, Check Point receives large upfront payments that are immediately recognized as revenue. In contrast, the company's new businesses such as CloudGuard and Infinity generate annual revenue in the form of subscriptions.
This accounting trick makes year-over-year revenue growth comparisons challenging as the company is transitioning from products to subscriptions. But since upfront payments should represent a diminishing part of total revenue, this headwind should wane over the medium term, which should boost revenue growth.
In addition, management indicated during the earnings call that it was still looking for acquisitions to enhance its new offerings. And Check Point has the dry powder to execute this strategy: Thanks to its high operating margin (44.2% in 2019), the company has accumulated $4.0 billion of cash and equivalents, without debt.
Besides, Check Point can take advantage of its large customer base -- more than 100,000 organizations of all sizes -- to scale its acquisitions. For instance, following its purchase of Protego in 2019, it will integrate the start-up's serverless security technology (which protects some cloud-based services) into its Infinity platform.
As a result, the double-digit revenue growth of its expanding cloud-based cybersecurity portfolio should boost the company's performance over the medium term. And assuming no major misstep, there's no reason for the company's revenue growth not to get closer to the double-digit growth of the cybersecurity market in the next few years.
Exposure to the cybersecurity market at a reasonable price
Based on its enterprise value-to-sales ratio of 7.8, Check Point's stock doesn't seem attractive, even if you assume a higher revenue growth in a couple of years. But this ratio doesn't take into account the company's low expenses that command its impressive operating margin.
Based on the midpoint of guidance, the market values the company at 20.3 times its forecasted earnings under generally accepted accounting principles (GAAP), which looks a bit rich given its low revenue growth. But you should keep in mind this ratio ignores the $4.0 billion of cash on Check Point's balance sheet, which represents an important part of the company's $17.4 billion market capitalization. And if you assume revenue growth acceleration over the medium term, Check Point seems fairly valued.
Thus, given the context of lofty valuations of high-growth non-profitable cybersecurity stocks, Check Point represents an interesting alternative for investors looking for exposure to the cybersecurity market at a reasonable price.