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

Easier Comps And A Reasonable Valuation For Check Point

Check Point (CHKP) remains an intriguing, yet frustrating, investment option in the security space for me. On one hand, I like the company’s strong cash flow and large installed base. On the other hand, I continue to believe that the company has under-invested in the business and allowed Palo Alto (PANW), Fortinet (FTNT) and others to grow at their expense. With management stepping up its sales and marketing investments and an easier set of comps in the first half of 2019, the time may be ripe for Check Point to post a little momentum and perhaps outperform in a market that could still be pretty dicey in 2019, even though underlying security spending should remain healthy.

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Easier Comps And A Reasonable Valuation For Check Point

Wall Street Seems Skeptical Of Palo Alto's Transition

Past success may buy you a little benefit of the doubt on Wall Street, but only just a little. While it’s hard to quibble with Palo Alto Networks’ (PANW) track record as a disruptor and growth story in the security space, that hasn’t helped the shares so much in recent months. While security spending looks pretty healthy going into 2019 and the death of the firewall (due in part to transitions toward cloud/hybrid-cloud approaches) has been greatly exaggerated, Wall Street does seem uncertain about the company’s pivot toward more cloud-oriented solutions and a new executive leadership team whose career experience in the security space isn’t as deep.

I don’t dismiss those industry experience concerns out of hand, but I think Palo Alto has brought on some talented executives that can help Palo Alto stay nimble and evolve – doing what worked in the past as your end-markets change is a pretty good way to get left behind in technology. Palo Alto looks cheap enough now that I’m a little paranoid and wondering what I may be missing; I get that the market has soured on tech stocks and that 2019 could be a more challenging year than 2018 was, but the shares seem to be discounting a pretty weak scenario today.

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Wall Street Seems Skeptical Of Palo Alto's Transition

Check Point Looks Like An Option To Consider In A Shaky Tech Market

Back when I paid more attention to football, my favorite team had a running back about whom I would say “if you need 3 yards, he’ll get you 3.5 yards; if you need 4 yards, he’ll get you 3.5 yards.” I’m reminded of that whenever I look at Check Point (CHKP), as this leading security software vendor continues to hold a strong position in the enterprise security market despite the inroads made by competitors like Palo Alto (PANW) and Fortinet (FTNT) and steady competition from the likes of Cisco (CSCO), as well as new up-and-comers. Check Point is unlikely to ever be a truly impressive growth story again, but the company’s margins, cash flows, and strong installed base have value – particularly in situations where the market has become much more worried about near-term growth prospects and valuation for software.

Check Point looks a little undervalued to me, and the company could benefit from somewhat easier comps in the coming quarters and improving salesforce execution, as well as ongoing growth in its Infinity Total Protection offering. Check Point isn’t going to be immune to an intense or prolonged sell-off in tech stocks, but I think it can hold up better than most and there’s decent underlying long-term value.

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Check Point Looks Like An Option To Consider In A Shaky Tech Market

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

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

Without More Revenue Growth, Check Point's Valuation Is Almost Beside The Point

Normally, investors would be happy with a company that generated more than twice as much operating income growth as revenue growth and actually reduced operating expenses. But then, software isn't a normal sector and Check Point Software Technologies (CHKP) isn't a normal company. In a sector where revenue growth is a major driver, Check Point's focus on expense discipline and organic/internal development hasn't been generating much revenue growth and hasn't helped the share price much next to Fortinet (FTNT), Palo Alto (PANW), or the Nasdaq.

One of my biggest concerns about Check Point is that the company will keep itself lashed to the mast of a ship that's not going anywhere (traditional firewall-type security) instead of taking more aggressive steps toward growth in the evolving enterprise security world. I don't doubt that Check Point has the resources to change its trajectory, but I'm not sure it has the will. With that, although the share price/value proposition is interesting, I'm nervous about buying into a lower-growth software story, given how challenging and frustrating they can be.

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Without More Revenue Growth, Check Point's Valuation Is Almost Beside The Point

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: Can Fortinet Deliver A One-Two Punch Of Growth With Higher Margins?

It's probably true of all industries to some extent, but the enterprise/network security business seems to be one where there's always some nagging detail for the companies. Check Point (CHKP) has fantastic margins, but hasn't always been quick to innovate and seems willing to cede margin to maintain share. Palo Alto (PANW) has a great sales effort, but sometimes seems to overstate its own capabilities. For Fortinet (FTNT), the challenge is pairing good revenue growth and share gains with strong margins, and judging by management's guidance that challenge will continue on at least another quarter.

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Can Fortinet Deliver A One-Two Punch Of Growth With Higher Margins?

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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