As per Check Point’s website, “Check Point Software Technologies Ltd. (www.checkpoint.com) is a leading provider of cyber security solutions to corporate enterprises and governments globally. Its solutions protect customers from 5th-generation cyber-attacks with an industry leading catch rate of malware, ransomware and other targeted attacks. Check Point offers a multilevel security architecture with our new Gen V advanced threat prevention that protects all networks, cloud and mobile operations of a business against all known attacks combined with the industry’s most comprehensive and intuitive single point of control management system. Check Point protects over 100,000 organizations of all sizes.“
The firm was founded in Israel in 1993 and has grown a lot from its early years. In 1995 Check Point brought in just of $10M in sales, in 2017 the firm reported $1.85B of revenue for the fiscal year. The market for cyber security products and services has grown substantially throughout the years, and the trend shows no signs of slowing down. According to a Forbes article titled “Global Information Security Spending To Exceed $124B in 2019, Privacy Concerns Driving Demand” by Roger Aitken, the worldwide market for information security products and services was on track to reach $114B in 2018, and in 2019 it’s analyst is forecasting the total market to grow 8.7% to $124B.1 Still, other forecasts see the near term market growth rate even higher. MarketWatch estimated a 10% CAGR from 2017 to 2024, with a 2022 estimated market value size of $170B.3
Keeping a close eye on corporate cybersecurity breaches it is clear to see why the industry is growing so consistently. The attacks aren’t limited to corporations (like Under Armour’s MyFitnessPal app which was breached in February of 2018 to the tune of roughly 150M user’s email addresses and login information), according to an article by Wired titled “The Worst Cybersecurity Breaches of 2018 So Far” by Lily Hay Newman, in the first half of 2018 hackers were successful at infiltrating U.S. power companies and over 300 U.S. universities.2 These breaches are not cheap either, to paint the picture more, “…it is estimated that cybercrimes will cost the world $6 trillion annually by 2021, up from $3 trillion in 2015, according to a Cybersecurity Ventures report.”4 So while an economic slowdown is always possible, the firms within the cybersecurity industry are very well positioned in the near term. This is because companies, governments, universities and other entities with valuable data cannot reasonably decide to spend less on cybersecurity because of the immense financial and reputational impact a hack can have.
Clearly the market is robust and trending to continue to grow in the 7-10% annual range depending on the analyst forecast, but there are a large number of players in the industry and some could be considered juggernauts. Taking a look at the “Cybersecurity 500 List, 2018 Edition” by Cybersecurity Ventures, Check Point came in 11th place. Some of the notable names on the list other than Check Point are CyberArk, Cisco, IBM, Microsoft, Amazon, FireEye and Palo Alto Networks. Fortunately, the cybersecurity needs of various customers is far from capable of being a one size fits all fulfillment. Check Point offers a unified threat management system, linking together network security, cloud security and mobile operations. This is a full picture protection offering; many other firms offer more specified product solutions that only tailor to a specific type of threat prevention. For instance Amazon is focused on cloud-powered security protection.5 This is a positive differentiator because while these firms are competing, they are not necessarily targeting the same customers within the market.
Turning to the financials of Check Point, I took the fiscal year end data from 2011 through 2017 to see how the firm has been performing. Starting with the income statement, the firm’s top line growth has an annual growth rate of 6.8% over this six year time period. Net income has nearly kept pace with the top line growth, the annualized growth rate for the net income over the same time period was 6.7%. Since Check Point has been consistently buying back shares, the earnings per share of the firm has been growing at a faster rate than both net income and revenues. The six years through 2017 yielded an 11% annualized growth rate in EPS. Additionally, Check Point’s operating and profit margins have held up nicely as the company has expanded their revenue base. The firm’s operating margin was 50% in 2017 compared to 51% in 2011; while, the profit margin was 43% in 2017 down from 44% in 2011. These margins are great and they do not appear to be depreciating in any material way. The firm appears to be readily preparing for the future as well, Check Point has spent an average of 10% of revenue on research and development from 2011 to 2017. Furthermore, using 2018Q3 nine month data, and 2017Q4 three month data, I calculated a trailing price to sales ratio of 9X, and a trailing price to earnings ratio of 21.55X. These fundamental ratios are in line with historical averages over the past seven years through 2017 of 8.8X P/S and 19.9X T12M P/E. Check Point compares favorably based on these two figures relative to the firm’s closest peer (based on market-cap), Palo Alto Networks, which had a trailing 12-month price to sales ratio of 7.9X as of 10/31/2018, and an earnings per share figure over the same time span of -$1.32 making their P/E ratio incomparable.
Geographically Check Point is well diversified. Geographic diversification is important because it mitigates the risk of individual countries business cycles and country-specific economic shocks. Taking a look at the chart below I put together using data from Edgar, while the Americas region has made up an average 48% of total revenue from 2013 to 2017, the highest growing geographical segment has come from the Asia-Pacific/Middle-East/Africa regions.
Although Check Point has made several acquisitions throughout the years (as per the list below from Check Point’s website), the balance sheet showcases that they did not overpay for these businesses.
• October 2018: Dome9
• April 2015: Lacoon Mobile Security
• February 2015: Hyperwise CPU-Level Threat Prevention
• October 2011: Dynasec
• June 2010: Liquid Machines
• December 2009: FaceTime Communications’ application database
• March 2009: Nokia Security Appliance Business
• January 2007: Protect Data
• January 2007: NFR Security
Goodwill, a measure of the acquisition price over the value of identifiable intangible assets, tangible assets and liabilities, has consistently made up about 15% of total assets. Another noteworthy aspect of Check Point’s balance sheet is that the firm carries no debt. This is a rarity in the technology sector as firm’s often take on debt in order to make acquisitions. For instance, Palo Alto Networks (a similarly sized cybersecurity firm) held over $1.6B of total debt as of their latest quarter end. Check Point’s lack of debt, in addition to its 10% annual growth rate in retained earnings, showcases that the firm has ample opportunity to spend more or take on debt if an acquisition or business expansion of interest does appear in the future.
The cash flow statement tells a similarly positive story as both the income statement and balance sheet did. Check Point’s cash flow from operations has grown at a 7% annualized rate from 2011 to 2017.
Historically the firm has reported cash flow from operations to net income multiples between 1.2X and 1.4X; this is a positive indicator of non-aggressive financial reporting practices. Check Point’s free cash flow has also grown consistently throughout the seven years through 2017. While there are many ways to look at free cash flow, for this analysis I used the cash flow from operations value and added back amortization costs, and subtracted research and development costs. This calculation yielded a 6% annualized free cash flow growth rate between 2011 and 2017, rising from $664M in 2011 to $919M in 2017.
Cybersecurity is forecasted to be a steady growth industry for the next 5 to 10 years. Check Point Software Technologies is a well-run firm that has made a name for itself in a competitive industry.
With strong margins, a promisingly steady growth rate in the earnings per share, no debt, and about $2B in current assets on hand I have concluded that Check Point is a great addition to a diversified portfolio. Not all firms are made the same, and historically Check Point has proven that it can intelligently grow the business while rewarding shareholders. With an increasing awareness of the potential losses that manifest from cybersecurity hacks by both government and corporation leaders, Check Point should thrive in the years to come as the global cybersecurity industry continues to expand.