Is Check Point Software Technologies Ltd. a Buy?

Check Point Software (NASDAQ: CHKP) is often considered a pioneer in the cybersecurity industry. The Israeli company, which was founded by three former members of the Israel Defense Forces in 1993, upgraded traditional enterprise firewalls with "stateful inspection" tools which track the operating state of all network connections that pass through a system. It also sells ZoneAlarm, a popular firewall for mainstream users.

Check Point shares rallied 23% in 2017, beating the 20% gain of the ETFMG Prime Cyber Security ETF (NYSEMKT: HACK), which owns a basket of top cybersecurity stocks. For comparison, Palo Alto Networks (NYSE: PANW), the high-growth firewall provider founded by former Check Point employee Nir Zuk, rallied just 16%.

With data breaches on the rise, investors might be wondering if Check Point is a decent investment for 2018. Let's examine the bull and bear cases for Check Point to find out.

The bull case for Check Point

Check Point serves over 100,000 businesses and millions of users worldwide. It's constantly expanded that ecosystem via acquisitions of smaller companies like Zone Alarm, NFR Security, Protect Data, Nokia's Security Appliance Business, Liquid Machines, Dynasec, and Lacoon Mobile Security.

Research firm Gartner ranked Check Point as a market leader in the enterprise network firewall, mobile data protection, and unified threat management markets over the past several years. That "best in breed" reputation generates steady growth for Check Point, fueled by strong demand for its appliances and management gateways, along with higher subscription revenues for software "blades". Its customers are also upgrading to pricier packages with advanced threat protection solutions, and it's inking more deals with bigger customers with an aggregate transaction value exceeding $1 million.

Check Point's revenue rose 7% to $1.7 billion last year, and analysts anticipate another 7% growth this year when it reports its full-year numbers on Jan. 31.

Yet that revenue growth pales in comparison to that of Palo Alto Networks, which posted 28% sales growth last year. However, Palo Alto is only profitable on a non-GAAP basis, which excludes its big stock-based compensation expenses.

Check Point is profitable by both GAAP and non-GAAP metrics. Its GAAP and non-GAAP EPS both rose 21% annually last year, and analysts expect its non-GAAP earnings to grow 11% this year. Its stock also isn't expensive at 18 times next year's earnings, compared to Palo Alto's forward P/E of 45.

The bear case against Check Point

Check Point's reliable revenue growth, stable profitability, and low valuations make it a solid play on the growing cybersecurity industry. However, several analysts recently downgraded Check Point for a variety of reasons.

Credit Suisse lowered its price target from $110 to $105 in early November and reiterated its "neutral" rating on Check Point, citing a broader slowdown in demand for enterprise firewalls. However, the global enterprise firewall market is still growing at a steady rate -- research firm Wise Guy Reports expects the market to grow at a compound annual growth rate of 7.7% between 2015 and 2019.

RBC Capital also cut its price target from $120 to $115, stating that stabilizing blade growth rates couldn't offset its execution issues in the United States. Check Point acknowledged those issues last quarter, but attributed them to an expansion of its sales force, which resulted in a temporary period of adjustment "with many new people in key positions."

BMO Capital also cut its price target by a dollar to $114, questioning the sustainable growth of its network security business. But during last quarter's conference call, Check Point CEO Gil Shwed countered speculation that customers were shifting away from network security purchases toward other security products. Shwed stated that the "simple answer" was that he hadn't "seen customers shifting" to other security markets.

In December, JPMorgan downgraded the stock to "Neutral" while reiterating its $121 price target, stating that it didn't expect Check Point to repeat the "exceptional performance" of its 2017 software sales in 2018.

So should you buy Check Point?

I believe that Check Point's strengths clearly outweigh its supposed weaknesses. Whether or not its stock can repeat its strong rally in 2017 is questionable, but I believe that it remains one of the safest long-term bets on the cybersecurity market today.

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Leo Sun 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 Gartner and Palo Alto Networks. The Motley Fool has a disclosure policy.