Has the Time Come to Sell Check Point, the Reliable Cyber Stock?

  • Palo Alto Networks, Cisco are threatening its market share
  • Investors fret boom in security spending may peter out in 2016

Check Point Software Technologies Ltd.’s reputation among cybersecurity stocks rests on being a safe, if boring, investment. Now shortsellers are circling the world’s top firewall provider in anticipation of a stumble. 

Bearish bets against Tel Aviv-based Check Point made up 12.9 percent of shares outstanding on Jan. 14 after touching a record 13.5 percent in December. The stock has tumbled 13 percent in the past month, compared with a 10 percent decline in the ISE Cyber Security ETF.

Check Point, which boasts the highest operating margin among 20 global peers, may not be the fastest-growing, but it’s been the most reliably profitable, according to FBR & Co. With rival Palo Alto Networks Inc. forecast to report sales growth almost five times faster than Check Point’s and Cisco Systems Inc. redoubling efforts to retake market share, the Israeli company may have to sacrifice profits or risk losing ground to competitors.

Party Over?

“They’ve had a great few years and there’s a view that the party’s over,” said Daniel Ives, an analyst at FBR in New York. Check Point “had a target on its back, and now it becomes a prove-me stock going into earnings season,” he said.

Check Point will report $758 million in profit on $1.6 billion in revenue for 2015, a 9 percent increase in sales, according to the average estimate of 28 analysts surveyed by Bloomberg. The company reports earnings Jan. 28. Palo Alto Networks, co-founded by ex-Check Point engineer Nir Zuk, reported $75 million in net income on $928 million in revenue in its fiscal 2015 year, a 55 percent jump.

That hasn’t spared Palo Alto shares from the selloff. Both companies are caught up in a broader rout as investors fret the hyperbolic growth triggered by high-profile data breaches at companies like Sony Corp. and JPMorgan Chase & Co. will fizzle out this year.

Not everyone agrees. Peter Andersen, chief investment officer at Congress Wealth Management in Boston, which oversees $7.5 billion in assets, predicts governments and companies will continue to dedicate ample resources to fighting cyber attacks and terrorist threats that are here to stay.

‘Tremendous Play’

“I am totally optimistic and bullish on cybersecurity and even in today’s horrendous market, I think it’s a tremendous play,” Andersen said by phone. “It’s more like a horse race at this point in terms of who’s going to win the biggest contract, but there’s plenty of business to go around.”

Andersen said he owns shares of Palo Alto Networks and CyberArk Software Ltd., but not Check Point.

While Check Point’s 54 percent operating margin is at risk of coming down, it’s still a buy to the majority of analysts, Bloomberg data show.

“It’s actually attractively priced given the company’s strong earnings,” said Jonathan Ho, an analyst with William Blair & Co. in Chicago. “The company hasn’t been losing share, they seem to be maintaining their share, so far, even as Palo Alto’s has grown.”

Check Point stock slipped one percent last week to $75.95 a four-month low. It rose just 3.6 percent last year, following a 22 percent gain in 2014.

On a third-quarter earnings call in October, analysts quizzed Chief Executive Officer Gil Shwed on whether he’s investing enough to fend off competition. He said the company last year increased its sales force and marketing while also making two small acquisitions in mobile and cloud security. It will reevaluate the pace once full-year results are in.

Merger Talks

Check Point is in preliminary merger discussions with CyberArk, an Israeli firm that specializes in privileged account security, Israeli business newspaper The Marker reported last week. Both companies declined to comment on the report. Analysts say such a merger would make sense for Check Point in a climate where the proliferation of new security companies makes the industry ripe for consolidation.

Check Point “has relied a lot on organic growth, but the times now are different from five years ago -- it’s a competitive market with lots of consolidation,” said Arik Kleinstein, a partner at Glilot Capital, a Herzliya, Israel-based venture capital firm. “The leadership of Check Point is facing some challenges.”

Before it's here, it's on the Bloomberg Terminal.