Check Point Software Technologies (CHKP 0.82%) may not be a fashionable name in the cybersecurity industry, but the Israel-based company could be an ideal bet for investors looking for a value stock amid a sea of richly valued companies in this sector.
After all, Check Point trades at just 19 times trailing earnings, while a forward price-to-earnings ratio of 15 points toward an improvement in the company's bottom line performance over the next year. For comparison, popular cybersecurity names such as Palo Alto Networks, CrowdStrike Holdings (CRWD -1.82%), and Fortinet sport expensive valuations (more on this below).
What's more, according to a consensus of 24 analysts covering Check Point, the stock has a median price target of $132, which points toward a 10% jump from current levels. The Street-high price target of $164 points toward a 35% jump. Should investors buy this attractively valued cybersecurity stock in anticipation of a healthy upside? Let's find out.
Check Point Software is growing steadily
Check Point released its first-quarter 2023 results on May 1. The company's revenue increased only 4% year over year to $566 million, missing the consensus estimate of $569 million. The cybersecurity specialist attributed its weaker-than-expected performance to challenging market conditions that led to delays in customers starting new projects and halted the company's product refreshes.
Savvy investors should look beyond Check Point's top-line performance last quarter. The company delivered non-GAAP earnings of $1.80 per share in Q1 -- a healthy jump of 15% over the prior-year period -- which was ahead of the $1.74 per share consensus estimate. The solid growth in Check Point's earnings was driven by an improvement in the company's subscription business and share repurchases.
More specifically, Check Point's subscription business recorded 13% year-over-year growth last quarter to $228 million, growing at a faster pace than the company's overall business. Management said that this impressive growth was driven by the robust demand for its cloud-based Infinity cybersecurity platform, which allows organizations to secure their complete networks from a single window.
Check Point revealed that the Infinity platform's revenue increased a massive 140% last quarter. That's not surprising, as demand for cloud-based cybersecurity solutions has been increasing at a tremendous pace. Fortune Business Insights estimates that the cloud security market could grow from $33 billion in revenue this year to $106 billion in 2029, clocking a compound annual growth rate of 18%.
So Check Point could witness stronger subscription growth in the future as the adoption of the Infinity platform increases. The growth of the subscription business should improve Check Point's revenue visibility as well. For instance, the company reported deferred revenue of $1.8 billion last quarter, an 8% jump over the prior-year period.
Deferred revenue is money collected in advance for services that will be delivered later. The solid improvement in this metric can be attributed to the growth of Check Point's subscription business and points toward a healthy revenue pipeline. As such, it wouldn't be surprising to see an acceleration in the company's top-line growth in the future, especially considering that the subscription business has more room for growth.
Check Point got 40% of its revenue from selling security subscriptions last quarter, up from 37% in the year-ago period. The contribution of the products and licenses business has gone down to 19% from 21% in the prior-year period. Check Point is already clocking impressive earnings growth, and further growth in the company's subscription business should help it sustain that momentum and outperform Wall Street's earnings estimates.
CHKP EPS Estimates for Current Fiscal Year data by YCharts
Why investors should consider buying the stock right away
As mentioned earlier in the article, Check Point Software is a value play in the cybersecurity space considering the double-digit earnings growth that it is clocking and its cheap valuation. Here's how the company's forward price-to-earnings ratio looks when compared to those of peers like Palo Alto Networks, CrowdStrike, and Fortinet.
CHKP PE Ratio (Forward 1y) data by YCharts
Of course, those companies are clocking much faster growth. CrowdStrike, for example, reported a 54% increase in revenue last fiscal year to $2.24 billion. The company has guided for terrific growth in the current fiscal year as well, and expects to hit $5 billion in annual recurring revenue by fiscal 2026 thanks to the massive addressable market it is sitting on. But CrowdStrike's expensive valuation -- it is trading at almost 13 times sales -- makes it susceptible to wild swings on the stock market. That's why Check Point looks like an ideal bet for investors with a low appetite for risk.
Buying Check Point stock at this valuation seems like a no-brainer. Assuming Check Point's earnings jump to $9.60 per share at the end of 2025 (according to the chart in the previous section) and it trades at 17.4 times earnings at that time (which is its five-year average forward P/E ratio), its stock price could jump to $167. That would translate into a 38% upside from current levels, which is why investors looking to add a cybersecurity stock to their portfolios may want to buy Check Point Software before it rallies higher.
