Check Point’s Earnings Beat Signals Cybersecurity Rally Not Over

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Check Point Software Technologies Ltd. is convincing investors their fear of a bubble in cybersecurity stocks is unfounded.

The data protection company’s shares recouped a month’s worth of losses in a single day last week after second-quarter earnings beat estimates, sending them up the most since 2012. Check Point had lost 8 percent in the month through July 20 on concern corporate spending could wane and competition from younger rivals will erode market share.

The rebound signals optimism that Check Point may benefit from increasing security spending amid high profile data breaches such as the attack on JPMorgan Chase & Co. and the U.S. government’s personnel office. That spending showed up in the earnings of Check Point and rival Fortinet Inc., whose profit beat analysts’ expectations by 23 percent last week. It’s also easing investor skepticism that cybersecurity stock valuations already reflect the pace of growth after a 68 percent rally over the past two years.

“There’s been a general fear among investors about whether the security trade is getting long in the tooth,” said Michael Turits, a New York-based analyst with Raymond James Financial Inc. “I think you come out of both Check Point and Fortinet with a renewed belief that the security trade is still on.”

Surpassing Estimates

Check Point said on July 22 that quarterly profit was $183 million on $395 million of revenue, surpassing the $177 million average profit estimate of 21 analysts. Revenue is forecast to grow nine percent this year to $1.6 billion. The stock rose 7.1 percent to $83.55 in New York in the five trading days through July 24.

Still, the Tel Aviv-based company isn’t the poster child for booming growth in cybersecurity. It’s lagging younger upstarts like Palo Alto Networks Inc., whose revenue is forecast to soar 50 percent this year to $900 million, and Fortinet’s 22 percent growth rate to $941 million.

Chief Executive Officer Gil Shwed has vowed to boost growth by adding sales people and investing in technology to detect more sophisticated cyberattacks and grow mobile security products. He bought two cybersecurity startups this year, Check Point’s first acquisitions since 2011, and announced a partnership with VMware Inc. this month to sell security for data centers. He says Check Point’s advantage is that it can offer a broad suite of products instead of piecemeal solutions.

“We have begun to see the benefits of increased corporate spending on security in terms of deals, but more importantly, we’re seeing our customers increasingly consolidating their cybersecurity budgets with us,” Shwed wrote in an e-mailed response to questions. He plans to increase the number of research and development workers in Israel by 30 percent to 1,300 by year end, he told reporters at a press conference in Tel Aviv last week.

Some analysts still think it’s not enough to catch up with rivals’ sales efforts.

“They’re still at a competitive disadvantage,” said Erik Suppiger, an analyst with JMP Securities LLC in San Francisco who has the equivalent of a hold rating on the shares. “Their next leg of growth is going to need to come from being able to attract new customers.”

Analyst Ratings

Check Point’s stock has risen 6.3 percent this year, compared with a 10 percent gain in the Bloomberg Israel-US Equity index, and a 16 percent gain in the Tel Aviv 25 index as of 2:20 p.m. local time. Palo Alto Networks has soared 61 percent, while Fortinet has climbed 57 percent.

About 67 percent of analysts covering Check Point recommend buying the shares, which are forecast to appreciate 13 percent on average in the next 12 months, according to data complied by Bloomberg.

Second-quarter earnings, particularly a pickup in billings growth, signal Shwed’s investments can help Check Point take advantage of continued spending on cybersecurity, said Turits of Raymond James.

“This is definitely a much more aggressive Check Point than we’ve seen historically,” he said. “If we worried that it was all Palo Alto and Fire Eye and Fortinet getting the lion’s share of the incremental spending, maybe by being more aggressive, Check Point can pick it up as well.”