Check Point Software Technologies Ltd. (CHKP - Free Report) has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters and delivering an average positive surprise of 3.6%.
With expected long-term earnings per share growth rate of 9.7% and a market cap of $15.8 billion, it seems to be a stock that investors need to hold on to if they are looking to reap long-term gains.
Check Point software’s rapid adoption of information technology (IT) security solutions is driving top and bottom-line growth.
However, the company’s share price movement reflects that investors are concerned about the ongoing issues related with the changes it made in its U.S. sales force. The company on its latest earnings conference call stated that new employees are taking much longer than expected to reach their full potential. The same is reflected in the company’s outlook too.
Nonetheless, we believe that this is a temporary issue and will be resolved soon.
Its approach of doing business makes us confident about the company’s growth prospects. Let’s have a look at management’s approach and why the company is expected to continue its momentum in the next year as well.
Shifting to Subscription-based Business Model
It is not a secret that Check Point Software intends to boost revenues by selling subscription-based solutions and services. In the first three months of 2018, Software Blades subscription revenues jumped approximately 14% year over year.
Although the company’s subscription-based Software Blades constitutes only approximately 26% of total revenues currently, looking at its fast growth rate, its contribution to total revenues is likely to increase significantly in the next few years.
It should be noted that this business model has very unique features — it generates stable recurring revenues with high gross margin. Therefore, the more the company sells subscription-based solutions and services, the more it will able to generate steady revenues — the benefit of which will trickle down to its bottom line.
Efficient Expense Management
We believe that Check Point Software’s approach of not growing at the cost of margins and earnings keeps it ahead of its peers like Palo Alto Networks (PANW - Free Report) , Fortinet (FTNT - Free Report) and Cisco (CSCO - Free Report) .
However, many believe that this approach might somewhat impede its top-line growth. Nevertheless, better control on spending has kept Check Point Software consistently profitable unlike its aforementioned peers, which are struggling with escalating overhead costs.
Notably, the trend shows Check Point Software spends only a quarter of its revenues toward sales and marketing, while its peers spend about 40-60% of revenues. This makes a huge difference, as with just a 7% rise in revenues, Check Point Software’s non-GAAP EPS grew 13% in 2017.
Check Point Software Technologies Ltd. Revenue (TTM)
Huge Cash Pile Provides Opportunities for Growth
The company’s debt free balance sheet, along with a huge cash balance of approximately $4 billion as of Mar 31, makes it easier for the company to fund growth initiatives, such as investments in research and developments, sales and marketing as well as acquisitions.
Also, its ability to generate substantial operating and free cash flow every quarter helps it enhance shareholders’ value through share repurchases.
Wise to Remain Invested
We consider that Check Point Software could be a good long-term safe bet for risk averse investors, given its steady revenue growth, increasing subscription-based revenues contribution, continued focus on cost minimization and a huge available cash balances to fund its growth opportunities.
On the valuation front too, the company looks very attractive. The stock currently trades at forward earnings multiple of 17.3, which is way lower than the peer group average of 82.7.
Check Point Software currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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