Check Point Software Technologies Ltd. CHKP is one of those cybersecurity companies that have demonstrated remarkable share price performance in the year so far. The stock has rallied 23.5% in the year so far, outperforming the ETFMG Prime Cyber Security ETF’s HACK return of 18.8%.
It is worth mentioning that the stock has managed to register this gain despite witnessing a significant plunge in the last two months. Notably, Check Point Software has lost about 12% of its value since last earnings (reported on Oct 31) as the revenue guidance for fourth-quarter 2017 fell short of street expectations.
The company, during its last earnings conference call, hinted that the fourth-quarter revenues might be hit slightly due to significant changes made in the U.S. sales force which may take some time to reach its full potential.
However, we believe this is a temporary issue and the newly joined sales forces will reach their full potential in the next quarter, and will once again display good revenue growth. Therefore, investors need not to worry about its growth prospects.
It is not Check Point Software’s earnings results, but its approach of doing business makes us confident about the company’s growth prospects. Let’s check out management’s approach and consider why the company will continue its momentum in the next year as well.
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Transitioning to Subscription-based Business Model
It is not a secret that Check Point Software intends to drive more revenues by selling subscription-based solutions and services. In the first nine months of 2017, Software Blades subscription revenues have jumped approximately 25% year over year.
Although, the company’s subscription-based Software Blades constitute only approximately 26% of the total revenues currently, looking at its fast growth rate, its contribution to total revenues is likely to increase significantly in the next few years.
It should be noted that this business model has very unique features — it generates stable recurring revenues with high gross margin. Therefore, the more the company sells subscription-based solutions and services, the more it will able to generate steady revenues — the benefit of which will pass onto the bottom-line performance.
Better Expense Management
We consider that Check Point Software management’s approach of not growing at the cost of margins and earnings keep it ahead of its peers like Palo Alto Networks PANW, Fortinet FTNT and Cisco CSCO.
This approach has remained a controversial point for the company as many believe this might somewhat impede its top-line growth. However, a better control on spending has kept Check Point Software consistently profitable unlike its aforementioned peers which are struggling with escalating overhead costs.
Notably, Check Point Software spends only a quarter of its revenues toward sales and marketing, while its peers spend about 40-60% of revenues. This makes a huge difference, as with just a 6% rise in revenues, Check Point Software’s non-GAAP EPS grew 15% in the last quarter.
Huge Cash Pile Provides Opportunities for Growth
The company’s debt free balance sheet, along with a huge cash balance of approximately $3.865 billion as of Sep 30, makes easier to fund its growth initiatives, such as investments in research and developments, sales and marketing as well as acquisitions.
Also, its ability to generate substantial operating and free cash flow every quarter helps it enhance shareholders’ value through share repurchases.
Stay Invested
We consider that Check Point Software could be a good long-term safe bet for risk averse investors, given its steady revenue growth, increasing subscription-based revenues contribution, continued focus on cost minimization and a huge available cash balances to fund its growth opportunities.
On the valuation front too, the company looks very attractive. The stock currently trades at forward earnings multiple of 19.6x, which is way lower than the peer group average of 43.28x.
Also, Check Point Software has a VGM Score of B. Notably, the VGM Score rates each stock on their combined weighted styles, helping to identify those with the most attractive value, best growth, and most promising momentum, across the board. This assures our point that the stock has still plenty of upside potential left.
The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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