Check Point Software Technologies (CHKP +0.29%) has been a perennial stock market underperformer over the years despite operating in the fast-growing cybersecurity industry. The company's cautious approach toward the cybersecurity market has failed to dazzle investors when compared to the likes of Palo Alto Networks (PANW +2.03%) and Fortinet (FTNT +2.70%).
But can Check Point Software Technologies hit a higher gear in 2021 and outpace its rivals? Let's find out.
Check Point Software is trying to step on the gas
Check Point's anemic top-line growth has been holding the stock back. Revenue for the first nine months of 2020 increased only 3.4% year over year. Its fourth-quarter guidance was also disappointing. Check Point estimates $550 million in revenue for the quarter that ended in December 2020, missing Wall Street's expectation of $555 million.
What's more, Check Point's 2020 revenue will increase just 2.8% over 2019 levels if it hits the midpoint of its guidance range. That would be disappointing as the company's revenue had increased at a faster rate of 4% in 2019. However, the novel coronavirus pandemic should share a part of the blame for this slowing revenue growth.
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Gartner originally anticipated cybersecurity spending to increase 8.7% in 2020. But the pandemic forced the firm to revise its estimate to a growth of just 2.4%. Check Point seems to have done well by that yardstick, as its 2020 revenue increase is likely to be in line with the broader market's growth. However, the company's performance pales in comparison to Fortinet and Palo Alto.
CHKP Revenue (TTM) data by YCharts
Fortinet's and Palo Alto's outperformance isn't surprising, as both companies are tapping into hot cybersecurity trends such as cloud security. Spending on cloud security was expected to jump 33% in 2020 as per a third-party estimate, and Check Point's rivals made the most of that opportunity. Fortinet, for instance, saw a sharp rise in its cloud-related business as organizations scrambled to protect critical data in the wake of a jump in remote workers.
Similarly, the demand for Palo Alto Networks' cloud security offerings increased amid the pandemic. The number of Fortune 100 companies using Palo Alto's integrated cloud security platform -- Prisma Cloud -- increased from 43% to 70% quarter over quarter. Additionally, 20% of the Global 2000 companies were using Prisma Cloud last quarter as compared to 14% in the preceding one.
Meanwhile, Check Point's cloud security business isn't big enough just yet to move the needle in a big way for the company. Cloud accounted for less than 10% of the company's revenue in the second quarter of 2020, though management pointed out that cloud-related revenue was up 70% year over year during the quarter.
Check Point's cloud security subscriptions surpassed 10% of the total revenue in the third quarter. The good news for Check Point investors is that it is trying to step on the gas in cloud security. It acquired cloud cybersecurity start-up Odo Security in September 2020 and got its hands on a service that could differentiate it from rivals' cloud offerings.
So, Check Point could see its cloud business become stronger in 2021, and that would be the key to an acceleration in its top-line growth. Analysts expect just 3% revenue growth from Check Point in 2021, but a strong showing from the cloud business could help the company surpass those expectations.
What should investors do?
In the third quarter of 2020, the legacy products and licenses accounted for nearly 24% of the company's revenue. The segment's revenue fell slightly year over year, extinguishing the 9.7% gains scored by the security subscriptions business. So, investors will have to remain patient and wait for the legacy business's influence on Check Point's top line to decline, while expecting the subscription business to pick up the pace.
The good part is that investors willing to bet on Check Point's accelerated top-line growth can still buy the stock at a reasonable valuation. Its trailing price-to-earnings (P/E) ratio of 22 is in line with the five-year average, while the forward earnings multiple of 18 points toward bottom-line growth. What's more, Check Point already has a strong margin profile as compared to rivals.
CHKP Operating Margin (TTM) data by YCharts
A stronger contribution from the higher-margin subscription business can boost Check Point's earnings power and turn it into a growth stock this year after years of underperformance.
