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

Maneerat de Nattakorn/iStock via Getty Images

Check Point Software Technologies Ltd. (NASDAQ:CHKP) is a stock that I believe is a must for anyone looking to improve the overall value of their portfolios. As an Israeli technology stock, it offers broad diversification to investors, while promising significant growth in positioning itself in the very dynamic cybersecurity market, which is set to experience explosive growth in the years to come.

Company presentation

Check Point Software Technologies Ltd. is an Israeli cybersecurity company, which has a global market presence with its wide portfolio of services offered. The company is classified as a large technology company, with a market capitalization of $18 billion and employing more than 5,000 employees at its various locations in Israel, the United States and Europe. Check Point is the most valuable Israeli company by market capitalization, as of April 22, 2022. Israeli chemical company ICL Group (ICL) is in second place with its market value of $15.12 billion, as of the same date.

Market overview

The international cybersecurity market was valued as worth $171 billion in 2020. With the explosive growth of information technology and supporting infrastructure over the past two decades, the concept of cybersecurity has seen increased relevance. Cyberattacks on computer systems have progressed far beyond phishing and malware infiltration attempts and have continued to be used as a form of warfare against states. Companies are also investing more and more in strengthening their cyber defenses against infiltrations, which have experienced a rise in power since the Covid-19 epidemic.

Cybersecurity Market 2020-2026

SDMmag.com

Cybersecurity is a phenomenon that is becoming more and more fundamental to a wide range of industries including healthcare, manufacturing, e-commerce, government sectors and many more. As a result, the scale of cybersecurity opportunities is immense. In a world that is increasingly being pushed towards complete digitization, the phenomenon of cybersecurity is positioning itself as a universal cornerstone in the next-generation status quo.

Most of the cybersecurity industry is centered around North America, particularly in the Silicon Valley area of ​​California. However, an emerging industrial powerhouse in the cybersecurity game has been the emergence, the next generation Israel’s tech industry. The country offers some of the most innovative technology companies such as CyberArk Software (CYBR), NICE Ltd. (NICE) and Wix.com (WIX). CHKP is the leader among these fast-paced Israeli technology companies, which offers the architecture to protect organizations against the 5and and 6and generation of cyberattacks.

Israel is a constant target of cyber warfare, with the most large-scale attack being carried out in March 2022. Various government websites were hit by a systematic wave of DDOS attacks, causing a temporary shutdown of government cyber network assets . The event caused a shift in perception towards cyber warfare which, although previously seen as an act of war, highlighted the seriousness of the threat. This dynamic places CHKP in a fundamental, highly strategic position, allowing it to seize market opportunities.

Financial performance

the latest publication of results for Check Point reinforces the idea that the company is growing. Its total revenue for 2021 was $2.17 billion, up from $2.06 billion the previous year. This growth was primarily driven by software subscriptions, which grew from $671 million in 2020 to $755 million in 2021. Compared to Check Point products and maintenance update services, subscription growth offers the most stable growth to the business, which is likely to persist despite changes in the market.

Checkpoint income

Check Point Annual Report FY21

Net profit for the year 2021 was reported at $815 million, down slightly from the 2020 figure of $846 million. The company attributed the reduced growth rate to a decline in interest income, which significantly impacted financial income, coupled with a higher tax rate. Stripping out the impacts of taxes and interest income, profit for 2021 was $907.5 million, compared to the 2020 figure of $892.6 million, indicating growth, compared to opposition to contraction.

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

Outstanding Check Point shares

Finviz

This buyback trend is good for investors as it increases the demand for CHKP in the secondary markets and leads to higher prices. Likewise, it concentrates ownership, as opposed to dilution, which results in improved shareholder value, delivering a greater share of the company’s bottom line, despite a negative growth rate in net income. The move is also an indicator of the company’s strong liquidity position, using its excess cash to buy back shares. Finally, the tax advantages of redemptions are significant, deferring tax on capital gains, as opposed to a standard dividend payment.

Valuation and competitive profile

In many ways, CHKP sits well above competing Israeli tech companies, making it a very attractive investment option for potential shareholders in many ways. Some of the metrics that reinforce this view are the comparison chart below, showing the fundamentals of Israeli tech stocks:

Teleprinter

Company

Market capitalization (B)

PER

SPE (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

ferSource 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

CAPA

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 S.A.

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

Taking an immediate look at the profile of each of the major Israeli tech companies listed above, CHKP’s most apparent competitive advantage is having the largest market capitalization, making it the Israeli company most valuable listed on the stock exchange. This gives the company a range of benefits such as fundraising, as well as preventing hostile takeovers. Despite being the most valuable company among comparable stocks, CHKP has one of the lowest PE ratios at 23.05, suggesting significant undervaluation. The market currently values ​​CHKP’s profits well below those of the industry, making it a very effective investment, which generates high profits.

The company’s EPS of $6.1 per share reinforces this view, which is significantly higher than any of its competitors. This, coupled with its impressive return on investment of 23.7%, another figure that far exceeds its competitors, indicates the value-added capacity of CHKP stock. The stock is best in class for investors, in terms of an efficient investment with high profits and a significantly undervalued stock considering what it offers. Investors would do well to buy this stock which has all the right indicators.

Compared to the global software industry, CHKP excels as a very high-growth Israeli technology stock that is seizing more and more opportunities in global markets. An indicator of this is the future ROE calculated by analysts for CHKP, compared to the entire software industry:

Check Point ROE

Simply Wall St

As seen, CHKP holds a three-year projected future ROE, more than three times that of the industry. This reinforces the idea that Check Point is a high-growth, value-efficient company that makes good use of its shareholders’ funds to generate profits.

Risks

I believe that CHKP faces a huge opportunity, which it has the ability to seize and translate into added value for its shareholders, which will drive future growth. However, one area of ​​risk that worries investors is Check Point’s reliance on its third-party distributors, which generate the bulk of its revenue. In FY21, 58% of its revenue came from 10 of its largest distributors, compared to 57% in FY20 and 55% in FY19. In fact, in FY21, nearly 40% of the company’s revenue came from just two distributing parties, which earned 39% of total revenue in 2020 and 37% in 2019.

This dependence on a limited number of distributors is part of a trend of annual growth, and the failure of a single distributor could potentially lead to a substantial drop in revenue. This dependence also extends to training and support services for its various products. To achieve a higher degree of business sustainability, Check Point should reduce this reliance over time and undertake diversification to reduce exposure to this risk.

Conclusion

CHKP is a stock with high growth potential, located in a market that is sure to see increased relevance and demand, across a growing number of industries, in the years to come. With a persistent trend of revenue growth and positioning itself as the most attractive Israeli technology stock, CHKP is a must-have stock for anyone looking to enhance the value of their portfolios and gain exposure to the cybersecurity space.

Comments are closed.