Check Point Software: Buy This Cybersecurity Stock (NASDAQ:CHKP)

ByJosephine J. Romero

Apr 27, 2022 , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

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Check Point Software Technologies Ltd. (NASDAQ:CHKP) is a stock that I believe is a must-buy for anyone seeking to enhance the overall value of their portfolios. Being an Israeli tech stock, it offers ample diversification for investors, whilst promising significant growth by being positioned in the highly dynamic cybersecurity market, poised to witness explosive growth in the coming years.

Company Overview

Check Point Software Technologies Ltd. is an Israeli cybersecurity specialist firm, that holds a global market presence with its wide portfolio of services offered. The company is classified as being a large tech company, with a market capitalization of $18 billion, and employing over 5000 employees throughout its various locations in Israel, the USA, and Europe. Check Point stands as the most valuable Israeli company in terms of its market capitalization, as of 22 April 2022. The Israeli chemical company ICL Group (ICL) trailing second with its market value of $15.12 billion, as of the same date.

Market Overview

The international cybersecurity market was valued as being worth $171 billion in 2020. With the explosive growth of information technology, and the supporting infrastructure in the last two decades, the concept of cybersecurity has been seeing an increase in relevance. Cyber-attacks on IT systems have progressed well beyond phishing attempts and malware infiltration and have gone on to be used as a form of warfare against states. Corporations too have been increasingly investing in strengthening their cyber-defenses against infiltrations, which have seen a ramp-up ever since the outbreak of Covid-19.

Cybersecurity market 2020-2026

SDMmag.com

Cybersecurity is a phenomenon that is increasingly becoming fundamental to a widescale range of industries including healthcare, manufacturing, e-commerce, government sectors, and many others. As a result, the scale of opportunity in cybersecurity is immense. In a world that is increasingly being pushed toward complete digitization, the cybersecurity phenomenon is positioned to be a universal cornerstone in the next-gen status quo.

The bulk of the cyber-security industry is centered around North America, specifically within the Silicon Valley zone in California. However, an emerging industrial powerhouse in the cyber security game has been the emerging, next-gen Israeli tech industry. The country offers some of the most innovative tech companies such as CyberArk Software (CYBR), NICE Ltd. (NICE), and Wix.com (WIX). CHKP is the leader amongst these fast-paced Israeli tech firms, which offers the architecture to protect organizations against the 5th and 6th generation of cyber-attacks.

Israel is a constant target of cyber-warfare, with the most widescale attack being carried out in March 2022. Various government websites had been hit by a systematic DDOS wave of attacks, causing a temporary shutdown of the government’s cyber network assets. The event brought about a shift in perception towards cyber warfare which, although previously regarded as an act of war, showcased the severity of the threat. These dynamics place CHKP in a highly strategic fundamental position, allowing it to capture market opportunity.

Financial Performance

The latest earnings release for Check Point reinforces the notion of the company being in a growth state. Its total revenue for 2021 was $2.17 billion, in comparison to $2.06 billion in the prior year. This growth was driven primarily by software subscriptions, which had climbed up from $671 million in 2020 to $755 million in 2021. In comparison to Check Point products and maintenance update services, subscription growth offers the most stable growth to the company, which is likely to persist despite shifts in the market.

Check Point Revenue

Check Point Annual Report FY21

Net income for the year 2021 was reported at $815 million, which came at a slight decrease from the 2020 figure of $846 million. The company has attributed this reduced growth rate to a decrease in interest income, which substantially impacted financial income, coupled with a higher tax rate. Removing impacts of tax and interest income, earnings for 2021 stood at $907.5 million, in comparison to the 2020 figure of $892.6 million, which points to growth, as opposed to a shrink.

Despite this, basic EPS saw an improvement over the years, climbing from $6.03 per share in 2020, to $6.13 per share in 2021. This was linked primarily to a buyback of shares, reducing the outstanding shares, in a trend the company has maintained throughout the past:

Check Point Shares Outstanding

Finviz

This buyback trend is favorable to investors, as it increases demand for CHKP in the secondary markets, and brings about a drive-up in prices. Similarly, it concentrates ownership, as opposed to a dilution, which results in an improvement of shareholder value, delivering a greater share to company earnings, despite a negative growth rate in net income. The move also is an indicator of the company’s strong liquidity position, by utilizing its excess cash to buy back stock. Finally, the tax advantages of buybacks are significant, deferring capital gains taxes, as opposed to a standard dividend payout.

Valuation And Competitive Profile

In many respects, CHKP stands far above competitor Israeli tech firms, which makes it a highly attractive investment option for potential shareholders, in many regards. Some of the metrics which reinforce this view are the comparative table below, showcasing the fundamentals of Israeli tech stocks:

Ticker

Company

Market Cap (B)

P/E

EPS (TTM)

Return on Assets

Return on Investment

Price

CHKP

Check Point Software Technologies Ltd.

18.7

23.05

6.1

14.20%

23.70%

137.29

SEDG

SolarEdge Technologies, Inc.

14.3

83.03

3.06

6.40%

9.60%

253.01

NICE

NICE Ltd.

13.2

68.77

2.98

4.50%

6.10%

202.08

MNDY

monday.com Ltd.

6.6

-3.07

-18.90%

-18.30%

133.71

CYBR

CyberArk Software Ltd.

6.6

-2.12

-5.20%

-5.70%

159.83

TSEM

Tower Semiconductor Ltd.

5.3

35.4

1.36

7.00%

8.60%

48.3

WIX

Wix.com Ltd.

5.2

-2.15

-5.70%

-36.50%

82.74

IS

ironSource Ltd.

4.5

75.89

0.06

5.10%

5.60%

4.12

NVMI

Nova Ltd.

2.9

32.02

3.12

12.50%

14.70%

98.67

FORTY

Formula Systems (1985) Ltd.

1.5

28.68

3.54

2.10%

13.20%

98.1

CAMT

Camtek Ltd.

1.4

22.82

1.34

15.00%

12.10%

30.61

RDWR

Radware Ltd.

1.4

187.83

0.16

1.30%

0.90%

30

SPNS

Sapiens International Corporation N.V.

1.4

29.03

0.85

6.70%

9.40%

24.32

WKME

WalkMe Ltd.

1.2

-1.16

-23.70%

-28.10%

14.7

Upon an immediate glance at the profile of each of the major Israeli tech firms listed above, the most apparent competitive advantage that CHKP holds is having the largest market capitalization, making it the most valuable Israeli firm that is publicly traded. This gives the company a range of advantages such as raising finances, as well as preventing hostile takeovers. Despite being the most valuable company amongst comparable stocks, CHKP holds one of the lowest PE ratios, at 23.05, suggesting a significant undervaluation. The market is currently pricing earnings of CHKP far beneath those in the industry, making it a highly efficient investment, that delivers high earnings.

The company’s EPS of $6.1 per share reinforces this view, which is substantially higher than any of its competitors. This along with its impressive ROI of 23.7%, another figure which heavily surpasses its competitors, indicates the value-adding capability of the CHKP stock. The stock is the best within its category for investors, in terms of it being an efficient investment with high earnings and a stock that stands significantly undervalued given what it is delivering. Investors would do well to buy this stock which has all the right indicators.

When compared to the global software industry, CHKP excels by being an extremely high-growth Israeli tech stock, which is increasingly capturing opportunities across the global markets. One indicator of this is the future ROE calculated by analysts for CHKP, in comparison to the software industry as a whole:

Check Point ROE

Simply Wall St

As is apparent, CHKP holds a future ROE projected across three years, which is over three times that of the industry. This reinforces the idea of Check Point being a high growth and value-efficient company, which adequately utilizes its shareholder’s funds to generate earnings.

Risks

I believe CHKP is faced with immense opportunity, which it possesses the capability to capture and translate into enhanced value for its shareholders, which will drive future growth. However, one risk area that raises concerns for investors is Check Point’s dependence on its third-party distributors, which drive the bulk of its revenue. In FY21, 58% of its revenue came from 10 of its largest distributors, in comparison to 57% in FY20 and 55% in FY19. In fact, during FY21 nearly 40% of the company revenue had come from only two distributing parties, who delivered 39% of total revenue in 2020, and 37% in 2019.

This reliance on a limited number of distributors is on an annual growth trend, and failure on the part of a single distributor could potentially result in a substantial drop in revenue. This reliance further extends to training and support services for its various products. To achieve a higher degree of commercial sustainability, Check Point would need to reduce this reliance over the years and undertake diversification, to reduce exposure to this risk.

Conclusion

CHKP is a high potential growth stock, situated in a market that is bound to see an increase in relevance and demand, in a growing number of industries, within the coming years. With a persistent revenue growth trend observed and standing as the most attractive Israeli tech stock, CHKP is a must-buy stock for all those looking to enhance the values of their portfolios, and gain exposure to the cybersecurity domain.

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