Robust ThemeDec 09, 2019 2020-04-08 7:40
Check Point Software Technologies
Check Point Software Technologies (CHKP)
Courtesy of Tijuana Jackson Academy
FINANCIAL REPORT: CLICK HERE
Current Price - $127.17, Intrinsic Value - $164.67, Recommendation – Buy
Check Point Software is a company that specializes in cybersecurity and provides both hardware and software solutions to other companies. The Company is a global leader in IT security and network infrastructure with over 90% of the Fortune 500 companies being its clients.
Growing Cybersecurity Demand
There are several tailwinds which will boost CHKP’s growth over the long term. First, the pandemic has bought about several long-term changes in the way offices operate, with remote work being the new normal. Even companies which are reluctant to switch have adopted a hybrid model where employees only need to report a few times a month. This change would not have been possible even five years ago, but as companies have increasingly migrated over to the cloud, the efficiency in remote work now parallels that of working from the office.
While cloud products create many opportunities for businesses, it also results in new ways for cyber criminals to attack companies. As companies continue to use more devices to improve operational efficiency, it leaves them more susceptible to cyber-attacks. This creates a substantial opportunity for CHKP as companies now consider cybersecurity spending essential compared to even a decade ago where it would have seemed unnecessary. As a result, the cybersecurity market is projected to grow at a CAGR of 11% between now and 2025 with a total market opportunity of $250 Billion.
Interconnected Platform Architecture
CHKP bases its offerings under four categories. This includes Quantum (Network Security), Harmony (Mobile Security), CloudGuard (Cloud Security) and Infinity Vision (Security Management). The company’s Quantum segment primarily deals with security appliances for large enterprises and data centres. Over 60% of the Global 2000 companies have purchased Quantum appliances, with the company continuing to maintain its leadership in this segment.
CloudGuard includes workload protection, application security and cloud security management and offers coverage to a majority of the existing cloud platforms. Harmony focuses on endpoint security, mobile, remote access and email security. Infinity Vision is a unified security management portal with capabilities which include a security operations centre and extended detection and response solutions. Harmony and Infinity Vision are relatively new offerings and should continue to grow over the long term.
Financials and Valuation
CHKP continues to battle with rivals Cisco and Palo Alto Networks in a crowded network security market. Despite this, the company has found a way to consistently grow its top line. CHKP has seen growth stall however as a result of the company prioritising legacy applications like firewall appliances. But the company is slowly branching out by building capabilities in cloud security, remote access and security management.
Additionally, while revenues have slowed down, the company has great margins and free cash flow, which it has used to repurchase shares, thereby boosting earnings. In fact, while revenues have only grown 20% over the last five years, the bottom line has grown an impressive 42% in the same period, as a result of a 20% reduction in the free float of shares.
Revenues are expected to grow at 3.5% and 3.1% in FY21 and FY22. CHKP has historically had strong margins with 90%+ Gross Margins and 40%+ Operating margins which is expected to continue despite a slight decrease, as the company switches its product strategy. We estimate the fair value of the company based on a DCF Valuation model which is $150.93.
To further reinforce the model, we have conducted an RIVM model and Comparable analysis, with both yielding valuations of $231.55 and $147.73 respectively. CHKP is a stock that’s grossly undervalued based on its margins and free cash flow generating ability. Furthermore, the company has zero debt and continues to deliver value through buybacks.
CHKP will continue to benefit from the long-term shift to remote work as cybersecurity becomes essential spending for most companies. The company has recently restructured its offerings to take advantage of the rapid growing market. Furthermore, the company continues to deliver stellar margins and free cash flow which it uses to buy back shares while having no debt on the balance sheet. Investors looking at the cybersecurity market will find a great buy in CHKP, especially with the hefty discount based on current valuations.