Investors are ditching this cybersecurity stock, but don’t miss the silver liners
Checkpoint software technologies (NASDAQ: CHKP) It was necessary to step on the gas in 2021 to put an end to years of stock market underperformance, but the latest findings from the cybersecurity specialist indicate that it may be some time before that happens.
Although Check Point beat Wall Street’s estimates for the fourth quarter of 2020, its forecast for the current quarter and the entire year fell short. Since the company was struggle to reach skyrocketing revenue growth compared to its more illustrious peers in the competitive cybersecurity market, it was no surprise to see investors throw away the stock after its quarterly report.
Does this mean investors should avoid Check Point stocks, or is it a good idea to keep an eye out for stocks for the hope of a turnaround down the road? Let’s find out.
The problem with Check Point software
Check Point Software’s 2020 revenue grew 4% year-over-year to $ 2.06 billion. The company also reported an 11% increase inGAAP earnings at $ 6.78 per share for the full year. Check Point is forecasting revenues of between $ 2.08 billion and $ 2.18 billion this year, as management pointed out in the latest call for earnings.
The midpoint of this range indicates a 3.4% increase in the company’s annual revenue this year. This deceleration in income is not the only thing that put investors off. Check Point established non-GAAP earnings of between $ 6.45 and $ 6.85 per share for the full year. The midpoint of this range indicates that the company’s bottom line could contract this year.
Check Point’s revenue was hit last year as offices remained closed due to coronavirus-related closures. Specifically, profits were positively affected to the tune of $ 0.25 per share, as “the level of spending in 2020 was extraordinarily low due to the cancellation of almost all physical activities,” CEO Gil Shwed explained. when calling for results.
The silver lining is that Check Point’s bottom line is expected to improve this year if we exclude the coronavirus-related gain from 2020 earnings. At the same time, Shwed said on the earnings call that the company will increase its earnings. investment in sales and research and development (R&D) this year compared to 2020 levels.
Such a move could give Check Point a much needed boost, as the company historically lags behind its cybersecurity rivals when it comes to R&D spending, sales and marketing.
This explains why Check Point’s revenue growth has not been as dramatic as its rivals over the years, who have aggressively sought to land more business with an aggressive customer acquisition strategy. It would be good if Check Point adopted such a strategy instead of spending a large chunk of its money to buy back stocks in order to support its profits. The company repurchased shares worth $ 1.3 billion in 2020, far exceeding its $ 822.7 million spend on R&D, sales and marketing.
Are there more silver liners?
Check Point Software’s cloud business saw double-digit percentage growth in 2020. Check Point needs to pull itself together in this space as the global cloud security market is expected to register a compound annual growth rate (CAGR) of 13 , 9% until 2024, as an estimate of a third. In addition, the rapid growth of cloud security market played a key role in the impressive performances of his rivals.
Thus, the strong growth of the cloud security market could help Check Point Software to take it to the next level. But this transformation may take some time, as cloud activity represented less than 10% of the company’s total revenue in the second quarter of 2020.
What Should Investors Do?
There are highs growth stocks offers in cybersecurity, but patient investors looking for a mix of value and stability in this market can keep their eyes on Check Point. This is because the company has a debt-free balance sheet and has a $ 4 billion cash balance (including marketable securities and short-term deposits), which it can use to accelerate its growth through ‘acquisitions or increased marketing spending.
Finally, Check Point is trading at less than 20 times the earnings. So investors willing to wait for the company to step up its game can get a reasonable multiple and stay seated for the long haul, as the transition from Check Point from a low growth to a high growth company is going to take time. . .
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.