By: Tim Milani, AIM Student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Check Point Software Technologies Ltd.
(NASDAQ: CHKP) is the largest pure play security vendor globally that
offers a complete security architecture of industry leading solutions to
protect their customers from cyberattacks. Their products include threat prevention, next
generation firewalls, mobile security and security management. The company is headquartered in Tel Aviv,
Israel and was founded in 1993.
•
Regions outside the US experienced a nice acceleration in sales growth with
Europe and Asia-Pacific leading the charge with revenue up by 12% and 19.5%
YoY, respectively. CHKP derives 45% of revenue
from the Americas and 37% from Europe.
• Operating margin in Q3 2017 grew 1.3% YoY
with Operating expenses growing at a faster rate of 3.6% YoY but these expenses
were also down by $5 million QoQ.
• The Yom Kippur holiday, occurring on the
last day of the previous quarter, was projected to potentially have an impact
upon $30 million in product revenue but was seemingly overestimated as CHKP was
able to pull through a greater amount than expected.
• CHKP hired a new head of worldwide sales
in Q2 2017 who came in with the goal to implement a set of changes including
the hiring of new people to focus on channel support and it is likely these new
hires have caused a weakness in sales especially in the US.
Key points: CHKP has a great
track record of stable, consistent execution and performance across its nearly
25 year history with over 100,000 businesses and millions of users utilizing
CHKP’s products and services worldwide.
The company has also been internationally recognized for its performance
winning numerous awards including an ICSA Labs 20 year excellence award in
2015.
Several
people in top management or director roles have had a long tenure at the
company of near 15 or 20 years. One of these is co-founder and current CEO Gil
Shwed who is also considered to be the creator of the modern firewall. Additionally, Chairman of the board of
directors and other co-founder Marius Nacht remains with CHKP. Both own substantial portions of the
outstanding shares of the company with Shwed owning 15.04% and Nacht owing
6.76% indicating they have great reason to continue to return value to shareholders.
While
CHKP has historically been a great company and investment some cause for
concern exists including likely slowdown of demand. This originates from many companies being
comfortable maintaining their current product offering and consequently, CHKP
cited longer sales cycles among large enterprises being probable.
Finally,
many analysts have recently revised their ratings down for the company upon
poor Q3 2017 performance with Morgan Stanley stating that “the overall firewall
market is slowing,” and that spending in the security industry is trending towards
non-firewall technology.
What has the stock done
lately?
CHKP
recently experienced a significant drop in share price after a poor Q3 2017
earnings report that failed to beat estimates and predictions for this trend to
continue into Q4 2017 as well as 2018.
Upon this news the stock on November 1, dropped nearly 15% from ~$118 to
~$103 with most analyst reports following including those from Morgan Stanley,
Deutsche Bank and Barclays indicating that they think the stock is currently fairly
valued near a price of $105. Predictions
for an increasingly competitive environment and slowing growth for CHKP will
likely keep the stock near its current price for the foreseeable future.
Past Year Performance: CHKP has had a good run this year with a 52
week range for the stock price being between $80.78 on 12/01/2016 and $119.20 on
10/13/2017. Until recently the stock had been performing well with billing
growth rates peaking at 13% YoY in Q1 2017. Subscriptions also began the year
with fantastic growth up to 27% YoY in Q2 2017. YTD FCF of $4.89 is up 18% YoY
and the company has plans to continue its share repurchase program with $250
Billion in Q3 and plans of an additional $1 billion in repurchases over the
next year.
However,
CHKP’s growth has slowed down in the most recent quarter across the majority of
its segments including a deceleration of subscription revenues to a growth rate
of 22% YoY suggesting that the company is having trouble renewing them. Revenue also decreased by 6% YoY, a trend
projected to increase to 8-10% in the next quarter.
Source: FactSet
My Takeaway
CHKP has been a great performer in the past and this year as
even after its price drop it still has returned 23.73%. However, as the latest trend seemingly
results from worry over long term indicators as opposed to temporary
inconveniences for the business regarding its growth, competitive environment
and new management it is cause for further concern. Moreover, it appears as though the company is
not as committed as its competitors to investment in key areas of its business
including R&D which was 15% lower than competitor Palo Alto’s contributions.
Taking all of the above into consideration these trends
suggest it is likely a good time to capture the historically great return from
this stock and cash out before a potential further drop in price. Therefore it is recommended that CHKP be sold
from the AIM International Equity Fund due to its weakened performance,
projections and fair valuation.
Source: FactSet