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Check Point Software Technologies Ltd. (CHKP), Palo Alto Networks Inc (PANW) & A Mixed Set Of Results For This IT Security Play

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It’s very easy to get a bee in your bonnet with investing, and there are certain issues and metrics that just become the one big thing that guides the performance of certain stocks. In the case of IT security play Check Point Software Technologies Ltd. (NASDAQ:CHKP) it is its falling (and now negative) product and license sales growth. In summary, there are mitigating circumstances, and there was some good news in the latest report, but until it gets this metric back on track, it is hard to see the stock aggressively re-rating from its undoubtedly low rating.

Check Point Software Technologies LtdCheck Point punching below its weight?

As usual, the management was forthcoming in outlining Check Point Software Technologies Ltd. (NASDAQ:CHKP)’s technological leadership and cited the IDC Worldwide 2012 Security Appliance Tracker (which claimed it was the leading firewall and UTM appliance market company) as a reference point. The company is known for the sophistication of its products but also for their high cost. Indeed, the latter is part and parcel of this company’s relatively mature position in the IT security market. Competitors like Fortinet Inc (NASDAQ:FTNT) may have better growth prospects (from a lower installed base), but no one generates margins and cash flow like Check Point Software Technologies Ltd. (NASDAQ:CHKP).

Unfortunately, I suspect that these characteristics are part of the reason for the falling product and license sales growth. In other words, Check Point Software Technologies Ltd. (NASDAQ:CHKP) appears to prefer sticking to its high-margin, high-quality razor blade model, rather than stepping up marketing or reducing prices to generate growth.

The results are obvious.

The mitigating argument (I know it because I held it) is that the company is deliberately bundling hardware and software together and trying to get the razors (hardware) installed so it can sell more blades. Moreover, it has increased the number of blades that it can sell to customers in recent years. Consequently, product sales growth should look weaker.

The problem with this argument is that software sales have started getting weaker, too, and the mid-point of revenue guidance for the second quarter would bring annual revenue growth down to a paltry 1.9%. Growth is clearly slowing.

Why Check Point’s growth is slowing

One explanation for all of this is that Palo Alto Networks Inc (NYSE:PANW)’s growth is eating into Check Point Software Technologies Ltd. (NASDAQ:CHKP)’s pie. Indeed the ‘Check Point Killer’ (Palo Alto Networks Inc (NYSE:PANW)’s founder is an ex-high-level Check Point Software Technologies Ltd. (NASDAQ:CHKP) employee) is growing rapidly and winning a significant amount of primary firewall business, even as its solutions are regarded as high ticket. On the other hand, Fortinet Inc (NASDAQ:FTNT) is usually seen as more of a cost-effective UTM vendor, and in this tough environment it is doing well (albeit with lower-than-expected results the last time around). Fortinet Inc (NASDAQ:FTNT) is starting to look interesting after the warning.

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