Why Check Point Software Technologies Ltd. Could Be a Gold Mine for Conservative Investors

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With its stock up 38% this year and share price bumping up against 52-week highs, Check Point Software (NASDAQ: CHKP) may not be one of the first investments a conservative investor would look at closely.

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It isn't Check Point's staggering top-line growth that makes the company stand out. Competitors like Palo Alto Networks (NYSE: PANW) and Fortinet have better growth rates. What makes Check Point a potential gold mine for conservative investors is how it's successfully transformed its business.

Tortoise or the hare?

In the age-old fable, it's the hare that sports the flash but the tortoise ultimately wins the race. A similar situation applies to Check Point. A couple of years ago, CEO Gil Shwed began aggressively moving Check Point away from the traditional sales business model of relying on (hopefully) big sales to new customers to drive growth.

Instead, because of his conservative leadership, Shwed opted to focus on driving Check Point's software subscription sales, seeking to build a stable and reliable stream of ongoing revenue. Though short-term investors weren't entirely happy with the shift, Check Point had its eyes focused on the future -- and today's shareholders are the better for it.

Last quarter's $459 million in total revenue was a solid, if not spectacular, 8% improvement year over year. Of its total sales, Check Point's recurring revenue subscriptions climbed 27% to $118 million. The 26% of Check Point's total sales that recurring revenue represents may not impress. Not only is that figure growing with each successive quarter, but there's also a bit more to the story.

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When you add in the $202.34 million Check Point generated from servicing its software customers and providing updates, subscriptions -- either on the front end or the back --was $320.34 million, equal to 70% of total revenue. Not surprisingly, that is another metric that is steadily increasing.

The other side of the coin

Another benefit to Check Point's adherence to an ongoing revenue approach is that it simply costs less to service and provide software updates to existing customers than the expenses associated with an overreliance on new sales. Check Point peer and competitor Palo Alto Networks is an ideal example that showcases the differences between the two methodologies.

Palo Alto reported an impressive 27% rise in revenue last quarter to $509.1 million. Sounds good, right? However, Palo Alto also reported sales and marketing-related expenses of $245.4 million. It cost Palo Alto what amounted to 48% of its revenue to drive its top-line results. When it was all said and done, Palo Alto's per-share loss was $0.42, 20% worse than last year's $0.35 a share loss.

The polar opposite was true in Check Point's quarter, despite "only" growing its top line 8%. For the quarter, Check Point's sales and marketing expenses totaled $114.68 million, equal to just 25% of its total revenue. That just over half the proportion of total revenue that Palo Alto spent on sales and marketing costs.

The differences are also evident on Check Point's bottom line, which is not only profitable but becoming more so on a consistent basis. Last quarter's $1.12 per-share earnings was an 18% increase over 2016's $0.95 a share. Check Point's per-share profits are steadily growing at a phenomenal rate given its quarterly revenue gains are generally in the high single digits.

If there was ever a buy-and-hold stock that won't keep investors up at night, Check Point is it. Strict expense management, steady revenue growth, and an outstanding bottom line that keeps increasing its profitability are why Check Point could be a gold mine for conservative investors.

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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Fortinet and Palo Alto Networks. The Motley Fool has a disclosure policy.