The Coca-Cola Company (KO) of the Internet

Margins

Check Point Software Technologies Ltd. (NASDAQ:CHKP) has an operating margin and profit margin of 55% and 46%, respectively. Just to get a a feel for the numbers, Coke’s margins are half that. These exceptionally high margins have positioned Checkpoint to make the incredible pile of cash that it has been earning. Fortinet Inc (NASDAQ:FTNT), for example, has operating and profit margins of ‘only’ 18% and 12%, less than one third of Checkpoint’s.

But high margins aren’t the whole story – A capital efficient business must be shareholder friendly in order to qualify as a worthy investment.

Shareholder- friendliness

Check Point Software Technologies Ltd. (NASDAQ:CHKP) employs an aggressive share buyback program. The massive free cash that the company generates has allowed it to buy back about 20% of its shares over the past decade, a trend that will likely continue. On the other hand, the company pays no dividend, which is a bad practice in my eyes. In the company’s defense I must add that given the extremely high internal returns it generates (18% return on capital, with zero debt), perhaps this is actually a positive for shareholders. Fortinet, on the other hand, shares this practice of not paying dividends to shareholders but maintains a lower return of only 14%.

The article This Company Is the Coca-Cola of the Internet Space originally appeared on Fool.com and is written by Shmulik Karpf.

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