Low Growth Continues To Undermine The Check Point Software Story

 

Between accelerating billings growth and high-profile cybersecurity incidents, you might think Check Point Software Technologies (CHKP) would be getting a little more benefit of the doubt. Unfortunately, that's not the case. While Check Point hasn't been a huge laggard relative to broader tech market since my last update (up around 7% versus around 11% for the NASDAQ), nor to Palo Alto (PANW), it's still underperforming and other security names like Zscaler (ZS), Fortinet (FTNT), and CrowdStrike (CRWD) have done significantly better. Pull out the comparisons to year-to-date or one-year, and it gets even worse.

I do think there is evidence of acceleration in the business, but it's still entirely fair to question whether it is enough and/or sustainable. Even with double-digit growth in subscription-based products, it seems unlikely that Check Point will be able to crack revenue growth much beyond the 3% to 4% range on a longer-term basis, and it's very tough for low-growth to get its due from a valuation standpoint. With that, while I do think that Check Point is undervalued, the company's fast-follower approach and reliance on larger corporate clients, not to mention weaker relative revenue growth outlook, aren't conducive to a higher multiple.

 

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Low Growth Continues To Undermine The Check Point Software Story

Growth Concerns Continue To Dog Check Point

Although not my favorite idea in security software (having expressed preferences for Palo Alto (PANW) and CyberArk (CYBR) in the recent past), I thought Check Point (CHKP) looked undervalued back in January even allowing for the suboptimal growth profile of this security company. Shares rose better than 15% since that last update, though the post-earnings sell-off has cut that in half and left the shares lagging Palo Alto, Fortinet (FTNT), and CyberArk (by a wide margin) since then.

Once again the key concern around Check Point is whether the company can generate enough growth, particularly now that the company is clearly sacrificing margin to pursue growth. At today’s valuation, I’m pretty ambivalent about Check Point. I believe this company would/will fare better in an economic downturn due to its large, well-established legacy customer base, but it’s tough to make money long-term in low-growth software companies and I’m not sold on the idea that Check Point has a plan in place to drive a meaningful acceleration in growth, particularly when 2018 was a strong year for the sector and Check Point didn’t really participate.

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Growth Concerns Continue To Dog Check Point

Exceptional Growth And Aggressive Evolution Still Drive Palo Alto Networks

Palo Alto (PANW) is a case-in-point as to why I don’t like to sell stocks just because they look expensive. Good companies, particularly those with a knack for disruptive innovation, have a way of driving ongoing growth above and beyond what seems reasonable to expect. In the case of Palo Alto, ongoing excellence in execution and a strong security market have led to another 17% move in the shares since my last update on the company. Nice as that is, and it handily beats the return of the NASDAQ over that time, it’s well short of what Fortinet (FTNT) and Check Point (CHKP) have delivered, and Fortinet and CyberArk (CYBR) have likewise outperformed Palo Alto on a trailing one-year basis.

Just as selling a strong growth stock because it looks “expensive” can be a regrettable mistake, so too can rushing to make up for lost time and over-correcting. I like the outperformance Palo Alto has been showing, I’m intrigued by the potential of Application Framework, and I think new CEO Nikesh Arora certainly has the right experience to transition Palo Alto into a new hybrid cloud world of security. But I also want to keep some semblance of sanity when it comes to valuation; even though Palo Alto’s potential growth rate for fiscal 2019 would argue for an even higher multiple than it currently sports.

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Exceptional Growth And Aggressive Evolution Still Drive Palo Alto Networks

Could Check Point Be Looking At Improving Momentum?

The 15% move in Check Point (CHKP) shares over the last three months looks pretty good against other security stocks like Palo Alto (PANW) and Proofpoint (PFPT), but stretch the time period out to just a year and Palo Alto, Proofpoint, Fortinet (FTNT), and CyberArk (CYBR) continue to outperform Check Point by wide margins, as Check Point continues to bumble along with low single-digit revenue growth and little-to-no near-term momentum in profits or free cash flow.

Check Point’s chronic problems with top-line growth remain a sticking point with me, and I don’t find the valuation as forgiving as I did six months ago (the shares are up 13% since then, beating the NASDAQ). On the other hand, Check Point’s issues may be more cyclical than appreciated and the company may be in the early innings of a cyclical upswing that has seen annual contract values peak roughly every two years going back about a decade. The old boilerplate warning about past performance not guaranteeing future results certainly applies (particularly with the different revenue model with Infinity Total Protect), but I think this name merits a little closer watching now.

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Could Check Point Be Looking At Improving Momentum?

CyberArk Worth Watching For Pullbacks

In a highly competitive and ever-evolving space, CyberArk Software (CYBR) looks like an interesting security name to me. Although there’s controversy and debate about the true size of the Privileged Access Management market, I believe it is a meaningful “second line of defense” that will be increasingly important to mid-sized and larger enterprises, giving CyberArk a chance to further penetrate a market that I believe could be worth somewhere around $5 billion. The valuation isn’t quite where I’d like to be, though, so this is a name I’m relegating to the watch list in the hope of getting a better entry price in the next year or two.

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CyberArk Worth Watching For Pullbacks

Palo Alto Networks Back In The Market's Good Graces, And Outperformance Is Getting Harder

I really can't complain about how Palo Alto Networks (PANW) has been performing since my last piece on the company in late September. At the time, a sales force reorganization and probably just some of the regular "hiccups" that go with any business led at least some sell-side analysts to try get ahead of the curve and call that the beginning of the end for traditional network security vendors like Palo Alto. Since then, the shares have risen about 40% - less than Fortinet (FTNT) and CyberArk (CYBR), but good enough to pull the jerseys of Check Point (CHKP) and FireEye (FEYE) up over their heads and give them a good pummeling - while year-over-year product revenue growth has re-accelerated from 1% (in FQ3'17) and 11% (in FQ4'17) to over 30% in this last quarter.

I'm less bullish on Palo Alto shares now, but only because of the growth expectations that the Street is now taking for granted. I like the company's two recent acquisitions and its ongoing efforts to expand its capabilities in areas like endpoint security and public cloud. Likewise, I think Palo Alto has the right "corporate DNA" to continue evolving, whereas Check Point more and more looks like a living fossil. Although I wouldn't chase the shares up here, this is definitely a name I'd reconsider on a pullback.

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Palo Alto Networks Back In The Market's Good Graces, And Outperformance Is Getting Harder

Palo Alto May Actually Be Underrated For Once

As a value investor, it’s almost painful to write this, but it looks as though Palo Alto Networks (PANW) may be a bargain when Check Point (CHKP) is not. Although I expect quite a bit more growth from Palo Alto, sales missteps and increased competition from Check Point, Cisco (CSCO), and Fortinet (FTNT) seem to have pushed Palo Alto down to a more interesting valuation even after a significant recovery from the lows earlier this year.

There are, of course, plenty of risks in the security market as enterprise customers try to figure out how to navigate the new cloud-filled landscape, but the basic underpinnings of IT demand seem sound, and Palo Alto has shown that it can combine technical excellence with strong marketing. If my model is in the ballpark, and Palo Alto can generate low-to-mid teens long-term growth in sales and adjusted FCF, a fair value in the $150s seems quite reasonable, with upside if/when the company can reassure the Street that its growth credibility remains intact.

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Palo Alto May Actually Be Underrated For Once

Familiar Concerns At Check Point

A few things seem to be perpetually true about Check Point Software Technologies (NASDAQ:CHKP). Despite a prominent position in the market, including leading firewall market share, nobody is ever really happy with this Israeli IT security company. The company's growth is no longer in the double digits. The company doesn't spend as much on R&D as Palo Alto (NYSE:PANW) or Fortinet (NASDAQ:FTNT). The company doesn't "play to win," but instead focuses on more or less holding steady in the market. And so on.

I can't and won't dismiss these concerns out of hand - most of them are factually true. It's also true that Fortinet and Palo Alto have blown past Check Point in terms of share price appreciation over the last five years, though CHKP has outperformed (it has gone down less) in the past year as the security stock market has come off a pretty crazy bullish bender.

I really do think this is a case of "it is what it is." What Check Point is today is what it will be tomorrow - a smart, well-run IT security company with a huge installed base, a "fast follower" strategy that mitigates risks and supports margins, and a better-than-credited core technology. With a fair value in the mid-$80s, it's a little undervalued today, but not dramatically so. I think Check Point is a good way to play long-term trends in security spending (which I would think would grow around mid- to high-single digits most years), with opportunities to build/lighten positions as market sentiment ebbs and flows.

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Familiar Concerns At Check Point

Seeking Alpha: Check Point Software - Solid Performance, Familiar Worries

The more things change, the more they stay the same for Check Point Software Technologies (NASDAQ:CHKP). While this Israeli IT security company still has a leading presence in enterprise IT security and margins that many CEOs could only dream of, a segment of the investing world remains steadfast that the company is doomed to lose share to Palo Alto (NYSE:PANW), Fortinet (NASDAQ:FTNT), and other relative newcomers over time.

To be fair, Check Point has lost market share ... but the erosion seen in recent years has been less than the bears predicted. What's more, while Check Point's "fast follower" strategy means it will always arrive after the party has started, the company seems to have a credible platform for advanced threat detection, endpoint security, and cloud. The shares aren't dramatically undervalued, but they do trade below fair value, and I still think this is a quality idea in the tech space.

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Check Point Software - Solid Performance, Familiar Worries

Seeking Alpha: Check Point Doesn't Need To Feel Insecure

The way things have been going lately, you'd think that Check Point Software Technologies (NASDAQ:CHKP) showed up to a Formula 1 race on a tandem bike. Check Point is certainly being outgrown by up-and-comers in security like Palo Alto (NYSE:PANW), Fortinet (NASDAQ:FTNT), and FireEye (NASDAQ:FEYE), and the shares have largely missed out on the hockey stick rise in security stock prices, but I wouldn't exactly call this leading firewall company chopped liver either.

I do believe that Check Point will hold more share in firewalls than many seem to think, and I think the company's fast-follower approach into areas like endpoint security do offer growth in the coming years. But to recycle that prior metaphor, talking about fair value in the context of software stocks can often feel like bringing a bike to a car race, and Check Point shares don't exactly jump out as shockingly undervalued on an absolute basis.

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Check Point Doesn't Need To Feel Insecure

Seeking Alpha: Check Point Software Still On Point

I've liked Check Point Software (NASDAQ:CHKP) as a good risk-reward play on the IT security space for some time and the stock worked reasonably well since my last article. The roughly 20% appreciation since then absolutely pales next to the performances of other security firms like Palo Alto (NYSE:PANW) and Imperva (NYSE:IMPV) (which have more than doubled), as well as Fortinet (NASDAQ:FTNT) and FireEye (NASDAQ:FEYE), but relative to old school tech stocks like EMC (NYSE:EMC), Cisco (NASDAQ:CSCO), and Oracle (NYSE:ORCL), the comparison is more favorable to Check Point.

I continue to like Check Point as a Goldilocks tech stock, but I don't think it is significantly undervalued today. Mid-single digit long-term growth supports a fair value close to $80, but Check Point doesn't seem structured to generate the sort of absolute revenue growth or relative share growth that would support major reratings.

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Check Point Software Still On Point

Seeking Alpha: Check Point Software Offers A Good Risk-Reward Trade-Off

After a tough couple of years in which analysts and investors questioned whether Check Point Software Technologies (CHKP) could maintain its market share against more aggressive up-and-comers like Palo Alto Networks (PANW) and Fortinet (FTNT) and whether the company's prioritization of margin over share was the right strategy, 2013 was a good year for the shares. That momentum has been holding up of late, as although Check Point didn't have a great first quarter, the company has avoided a lot of the negativity that has hit Fortinet, Palo Alto, and FireEye (FEYE) recently.

As a stock, Check Point is a much different proposition than Palo Alto, FireEye, or Fortinet. This company isn't disrupting the market and isn't likely going to be growing revenue at a frequent annual double-digit rate. On the other hand, it has strong market share and a good margin and free cash flow base. I don't see the same overall upside to Check Point as its smaller rivals, but on a risk-adjusted basis, the return is still good enough to make this a worthwhile stock for less risk-tolerant investors.

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Check Point Software Offers A Good Risk-Reward Trade-Off

Seeking Alpha: As Palo Alto Networks Disrupts The Market, More Gains Can Come

Next-gen security company Palo Alto Networks (PANW) certainly does not look all that cheap on backward-looking metrics like price/sales, but the company's share gain prospects and well above-average growth could lead to more price appreciation from here. Palo Alto already generates pretty solid free cash flow margins with less than 15% market share, and as the company looks to turn up the pressure on Cisco (CSCO) and Check Point (CHKP), margin leverage could move higher.

Certainly, there a lot of words like "could" and "potential" when it comes to Palo Alto. The company has built itself into a low-teens market share holder in the network security space, but Cisco, Check Point, Fortinet (FTNT) and the rest are not going to roll over. Likewise, there are ongoing concerns about the company's litigation with Juniper (JNPR), the direction of future network security threats and solutions, and the fundamental long-term profitability of the business. Expectations for Palo Alto are demanding, and the risk is above-average, but this still shapes up as a hybrid hardware/software company worth a closer look.

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As Palo Alto Networks Disrupts The Market, More Gains Can Come

Seeking Alpha: New Products, An Improving Market Helping Fortinet

Looking at the pace of upgrades, Wall Street has fallen back in love with Fortinet (FTNT) and its growth potential in the unified threat management world. From 12 strong buy/buy ratings three months ago to 18 today, the shares have gone from a sub-$17 dip in early December back into the low $20's. Perhaps just as important, though, is a more general recovery in security market conditions for Fortinet, Check Point (CHKP), and Palo Alto Networks (PANW).

Execution is still a concern, as the company needs to reverse this recent slide in margins. Likewise, there are still questions as to whether Fortinet's proprietary ASIC-driven performance advantages can stay relevant as the security market evolves. Those are valid questions, but I think Fortinet is likely to be a long-term winner, unless a buyout precludes that opportunity. The 25% rally in the shares has taken some of the cheapness away, but I still think this is an undervalued tech stock worth further research.

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New Products, An Improving Market Helping Fortinet

Seeking Alpha: Imperva's Valuation May Not Be So Ridiculous

I'm no fan of overheated tech momentum stories, but even with Imperva's (IMPV) shares up almost 60% over the past year, I'm not convinced Imperva is overheated. Certainly these are early days for web application firewalls and database-oriented security solutions, but Imperva has already established itself as the only company to address web apps, databases, and file activity monitoring and with appliance, software, and cloud delivery models.

Looking at what companies like Fortinet (FTNT) and Check Point (CHKP) achieved in their early years and the opportunity in securing both structured and unstructured data (as opposed to networks), I'm optimistic that a long-term revenue growth forecast around 20% is not ridiculous. That doesn't make Imperva a notably cheap stock today, but it does make it worth a spot on a watch list given the freak-outs that can drive significant pullbacks in security and enterprise software stocks.

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Imperva's Valuation May Not Be So Ridiculous

Seeking Alpha: Palo Alto Networks Trying To Win Back Wall Street's Love

It's so common as to be practically cliché - a young tech company with disruptive technology comes out as a hot stock, gets sell-side analysts racing to put out ever-higher targets, stumbles, and then has to spend some time in the penalty box before it wins back institutional investor love. We can argue about the extent to which Palo Alto Networks (PANW) has followed exactly that pattern, but I think the relative performance of "new security" firms like Palo Alto and Fortinet (FTNT) is pretty striking relative to "old security" firms like Check Point Software (CHKP).

I've long been a die-hard supporter of Check Point Software, but I'm actually wondering whether Palo Alto may be the better buy for the time being. True, the company does have to deal with litigation brought against it by Juniper (JNPR), and that may lead some investors to step aside pending a resolution. Likewise, the recovery in IT spending that seems to be emerging could go away with little warning. Even so, I think Palo Alto has a meaningfully better mousetrap in enterprise security and I think the shares may be undervalued to a worthwhile extent today.

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Palo Alto Networks Trying To Win Back Wall Street's Love

Investopedia: Is This The Turn For Check Point?

Waiting for the right time to jump into Check Point Software (Nasdaq:CHKP) was a trying exercise as the company's product revenue growth continued to grind lower and then turn negative. And now with the shares up almost one-quarter over the last three months, it looks like Wall Street has already moved on the recovery trade. The one solace for investors who've missed the move (myself included) is that even with exceptionally conservative assumptions, Check Point still does not look like an expensive stock and this company virtually mints money.

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Investopedia: Palo Alto's High Multiple And Slight Miss Prove To Be A Volatile Mix

Once again a relatively well-regarded tech growth company is going to pay the price for disappointing the Street. While Palo Alto Networks (NYSE:PANW) has definitely sold the Street on the idea that it's a major leap forward in network security, the valuation simply doesn't leave room for any shortfalls – even if they're pretty small in the larger scheme of things. Although I do have some fears that Palo Alto has oversold its capabilities, I have to admit that the stock is getting more interesting.

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Investopedia: Check Point Software Coulld Be A Second-Half Rebounder

It's pretty well-established that buying stocks in the summer months is a recipe for underperformance (the so-called “Sell in May and go away” effect). That's even truer for tech stocks, which makes the notion of buying underperforming Check Point Software (Nasdaq:CHKP) for a second half rebound sound a little crazy. Sometimes crazy works, though, and investors may have a real reason to keep an eye on these shares.

No Good News Yet In Q1

Check Point has had a growth problem for some time now, and that didn't get noticeably better in the first quarter. In fact, the best that can be said about Check Point's first quarter performance is that it marked the end of what has been more than a two-year period of sequential quarterly growth deceleration.

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Investopedia: Another Revision Doesn't Make It Easier To Like Juniper

I thought that 2013 could be the year where long-suffering stocks like Ciena (Nasdaq:CIEN) and Juniper (NYSE:JNPR) earned a little love from the Street. So far that hasn't been the case, though Cisco (Nasdaq:CSCO) and Ericsson (Nasdaq:ERIC) have shown some signs of life.

The real question for Juniper remains what it has been for some time now – can the company take/regain share from companies like Cisco and Alcatel Lucent (NYSE:ALU) in routing, gain share in switching, and stabilize the security business? Although carrier spending has been looking and sounding a little better, another downward revision in Juniper's guidance makes it harder to step up and take a chance with this stock.

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