Is Check Point Software a Buy right now?

Check Point Software (Check Point Software Stock Quote, Charts, News, Analysts, Financials NASDAQ:CHKP) looks to be headed for a loss for 2021, but investors should keep an eye on the stock, says Paul Harris, partner at Harris Douglas Asset Management. Harris says the sector tailwinds will likely keep Check Point in a growth mode for years to come.

Tel Aviv-based Check Point is down about 16 per cent year-to-date after the stock lost about ten per cent over the past month and a half. That’s part of a sector-wide pullback affecting other names in the space as well including CrowdStrike and Canadian security and tech company BlackBerry, which are both off substantially in recent weeks.

“Check Point is a cybersecurity company. It’s Israeli and they trade on New York. I think it’s got a great balance sheet, no debt like most tech companies and they’ve got good free cash flow growth,” said Harris, who spoke on BNN Bloomberg last Friday. “I think what’s happened with the company over the last little while is that they were much more of a licensing company and like most technology software companies they’re going to much more of a software-as-a-service [model], so their revenue has been very lumpy over the last little while. I think that into next year it’ll be better.”

In Check Point’s case, the $15-billion market cap company is delivering good results as witnessed by its third quarter 2021 from late October. There CHKP beat estimates with revenue increasing by five per cent year-over-year to $534 million, operating income at $225 million and EPS up just one per cent to $1.65 per share. Management increased its full-year guidance as well, saying its subscription revenues for its security services grew by 13 per cent year-over-year to $190 million, with strong demand for its features CloudGuard, Infinity and Harmony being singled out as one of the main factors in the topline growth.

“Third quarter results were strong and reflect solid execution during the quarter. Revenues came in toward the high-end of our projections and Non-GAAP earnings per share exceeded projections. Subscription revenues increased by 13 percent driven by triple-digit growth in Infinity platform sales and double-digit growth in Harmony and CloudGuard,” said Gil Shwed, Founder and CEO, in a press release on October 28. 

“During the quarter we further expanded the Infinity platform with the acquisition of Avanan, the fastest growing Cloud E-Mail and Collaboration Security Company to address the most vulnerable attack vector – malware delivered through E-Mail,” Shwed said.

Shwed said there’s been a noticeable upswing in cyber attacks of what Check Point calls large-scale fifth-generation attacks which are large-scale and multi-vectored and are aimed at infecting a number of systems at the same time. 

The CEO pointed to the increase in work-from-home scenarios for businesses which has spread out the attack surface for potential threats. As well, the growth in Internet of Things connectivity has changed the business landscape where other aspects of a company such as the manufacturing floor and the trading and development environments of a business are now opened up to the Internet and thus to potential threats. Add to that the growth in cloud and hybrid computing and you get a framework that’s more rife for cyber attacks than ever before.

“You can see here a few examples like Sunburst SolarWinds Quadcore, the Colonial Pipeline, the Caseya [Phonetic] and many, many other attacks that we’re seeing on an ongoing basis, sophisticated, multi-vector polymorphic, zero-day attacks that are very, very hard to identify and block and that’s the challenge of our industry to actually stop these attacks and keep them out of our environment,” Shwed said in the company’s third quarter earnings call.

Harris echoed the point, saying that a rise in cybercrime will keep Check Point growing for a while yet.

“The thing is that cybersecurity is becoming a big issue around the world and the US government has a big issue with it. So, I think it’s an area that will continue to grow over the next little while and Check Point can actually take advantage of that and grow quite successfully over the next couple of years,” Harris said.

Although its share price growth has slowed to a trickle in recent years, Check Point was once a strong performer for a good decade between about 2008 and 2018. The stock rose from about $20 in 2008 to $120 by the start of 2019. Since then there’s been a lot of ups and downs, with CHKP currently trading in the low $110 range. 

Check Point ended its third quarter having acquired cloud email security firm Avanan for $234 million, while its Q3 cash flow from operations was $251 million compared to $248 million a year earlier.