Hillel Yaffe Hospital, the Atraf dating site, and insurance company Shirbit have made headlines in the past few months after becoming targets for severe cyberattacks, and of course they aren’t the only ones. The number of cyberattacks is on the rise in Israel and globally, their sophistication is increasing, and the need for protection against them is clearer than ever.
Yet the share price of Check Point Software Technologies (Nasdaq: CHKP), one of the pioneers of cybersecurity solutions, and probably the most profitable company in the field, is not keeping pace. While many stocks in this sector have yielded investors double-digit, and even triple-digit, returns this year, Check Point shows a negative return of 13%, even though it consistently reports impressive profits, unlike many companies with higher market caps.
Check Point, led by co-founder Gil Shwed, currently has a market cap of $15.3 billion. Palo Alto Networks, which was founded by former Check Point employee Nir Zuk, and which at the start of the coronavirus pandemic in March 2020 had a market cap similar to that of Check Point, has a current market cap of $50 billion. SentinelOne, which was floated in June at a valuation of $9 billion, has now surpassed Check Point, with a market cap of $19.5 billion, after a 111% rise in its stock price since the flotation.
High risk of dropping out of the index
The return on Check Point’s stock is not only lower than those of other companies in the industry, but is also low in comparison with the Nasdaq 100 Index, which has risen by 26.5% so far this year. Check Point is part of that prestigious index, which includes the very largest companies on the exchange (other than financial companies). But today only one company in the index list has a lower market cap than that of Check Point.
This means that there is a high risk that after many years Check Point will drop out of the index in its annual update next month. Last year, six companies dropped out of the index, and were replaced by six others. Apart from the loss of prestige, being relegated from the index means that funds that track it will sell the stock.
In the past few months it has seemed that Wall Street investors prefer growth at almost any price, and richly reward companies with high revenue growth, even if that comes at the expense of the bottom line. Part of the explanation is that investors believe that these companies are making losses today with the aim of taking as much market share as they can and recruiting customers, thus ensuring future growth, which will eventually lead to profits.
Check Point actually presents precisely the opposite trend. It is growing at single-digit rates, and has generally been a conservatively-managed company that does not embark on big merger adventures. It promises its investors stability (it’s hard to recall it publishing a profit warning, for example), its growth is modest but consistent, and every quarter it generates positive cash flow and a net profit, on both a GAAP and non-GAAP basis. Companies like that do not excite the capital market these days.
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The very fact that, less than two years ago, Check Point and Palo Alto had similar market caps could point to the advantage of Check Point in the event that the market suddenly changes direction. Palo Alto’s share price fell fast when the coronavirus pandemic broke out, and Check Point’s stock was perceived as safer; in a period of uncertainty, investors preferred its large cash cushion and the fact that it was free of debt.
Today, the situation is different, and the market rewards safe companies less. At the end of the third quarter, Check Point had $3.8 billion cash, representing a quarter of its market cap.
“The Wall Street Journal” recently published an article on cybersecurity companies, in which it showed that of the ten most highly valued companies, seven posted losses in the last financial year. There was also a warning: Paul Auvil, CFO of cybersecurity company Proofpoint, which was bought by a private equity company this year and ceased to be publicly traded (it too was not profitable), told “The Wall Street Journal” “It won’t end well”, and estimated that some of the weaker companies were liable to suffer sharp falls in their market caps.
Meanwhile, however, the party seems to be continuing. This week, Credit Suisse published an extensive review of software and cybersecurity companies, and some of the stocks surveyed were awarded price targets 20-40% above their current prices.
Palo Alto, for example, is rated “Outperform” with a $625 price target, 21% above market. Credit Suisse’s analysts resumed coverage of Check Point, giving it an “Underperform” rating and a price target of $100, 13% below market.
Credit Suisse’s analysts believe that Check Point’s Infinity architecture is unique and distinguishes the company from the crowd, respect the company’s marketing efforts, and are encouraged by its product innovation, both organic and through acquisitions.
Neverthless, they say that they find it hard to spot signs of accelerated sales growth and improvement in sales that will lead to improvement in profit growth. Because Palo Alto and Fortinet are investing more than Check Point in RD and sales and marketing, Check Point will eventually have to invest much more in these areas, which will cut analysts’ estimates of operating profit, or else take the risk of losing market share to those two companies.
Check Point said in response: “Last month alone, after the release of financial statements in which we reported a 9% increase in billings, at least four important analysis companies raised their price targets for Check Point, and an important body like Deutsche Bank even upgraded its recommendation to “Buy”. This positive trend is in addition to other important metrics that make us – even in a peak year for flotations – one of the companies with one of the greatest mixes of strength, growth and profitability on Nasdaq in general and in the cybersecurity sector in particular. We shall continue to implement our strategy, which, as mentioned, is already yielding results.”
Check Point was founded in 1993 by Gil Shwed, Marius Nacht, and Shlomo Kramer. It was floated on Nasdaq in 1996. At the end of 2020 it employed 5,314 people, 2,259 of them in Israel, but since then it has been hiring and its headcount has grown.
Check Point is expected to end 2021 with revenue of $2.172-2.177 billion, and non-GAAP earnings per share of $6.81-7.01. On the release of the third quarter financials a few weeks ago, Shwed said, “We are seeing a very large increase in cyberattacks in Israel – attacks per enterprise have risen to an average of nearly 1,000 a week.”
27 analysts cover Check Point, most of them with neutral recommendations, six with positive recommendations, and three with negative ones. The average analysts’ price target for the stock is over $131, 14.3% above the current price.
Published by Globes, Israel business news – en.globes.co.il – on November 18, 2021.
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