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Monday, November 11, 2024

Check Point’s Stalled Growth: Is Innovation Losing Steam?

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BofA Securities analyst Tal Liani recently downgraded Check Point Software Technologies Ltd (CHKP) from Buy to Neutral, lowering its price target from $205 to $195. This significant move reflects concerns about Check Point’s modest growth trajectory despite investments in new products and go-to-market strategies. While the company reported Q3 revenue largely in line with expectations, the underlying growth rate and margin compression raised flags for the analyst, suggesting that the current valuation might be overextended given the company’s outlook.

Key Takeaways: Check Point Downgraded Amidst Growth Concerns

  • BofA Securities downgraded Check Point Software (CHKP) to Neutral from Buy, citing concerns about modest growth.
  • Q3 revenue met analyst expectations, but billings growth fell short, and adjusted operating margins declined.
  • Analyst predicts double-digit growth unlikely before 2025, driven by anticipated surge in appliance revenue.
  • Current valuation considered stretched given the projected growth rate.
  • Price target reduced to $195 from $205, reflecting the revised growth outlook.

Check Point’s Q3 Performance: A Mixed Bag

Check Point reported fiscal third-quarter revenue of $635.10 million, a 7% increase year-over-year. While this figure aligns closely with analyst consensus estimates of $635.14 million, a closer examination reveals a more nuanced picture. The growth rate itself is arguably modest, particularly considering the competitive cybersecurity landscape. More concerning, the adjusted operating margin decreased to 43%, down from 45% in the prior year, indicating rising expenses are impacting profitability. This decline in margins, coupled with slower-than-expected billings growth of 5.8% (against an anticipated 8.2%), fueled the analyst’s concerns. Liani highlighted the company’s weak billings growth as a key reason for the downgrade, stating, “**The overall low growth trajectory despite new products, portfolio additions, and ongoing go-to-market challenges is concerning.**”

Analyzing Revenue Streams

Check Point’s revenue is segmented into product, subscription, and maintenance components. The analyst notes that while product revenue rebounded after declines in the previous year, showing a 4.1% year-over-year increase, subscription revenue growth slowed to 11.5%, falling short of the anticipated 13%. The slowdown in subscription revenue presents a particular challenge, as this segment is generally seen as a more predictable and recurring source of income. Liani’s forecast suggests that to achieve 10% total revenue growth in 2025, product revenue would need an unrealistic surge from 4% to 20%. Instead, the analyst has modeled 1.6% product growth and 5.6% total revenue growth for 2025.

Long-Term Growth Outlook Remains Uncertain

Despite Check Point’s investments in innovative products such as Harmony, Infinity, and Quantum, coupled with ongoing investments in go-to-market strategies, the overall growth trajectory remains limited to the mid-single digits. Liani emphasizes that the market anticipates double-digit growth and a clear path to achieve this is currently lacking. He projects that such growth is not likely to materialize before 2025, driven largely by an expected surge in appliance revenue. This extended timeline is a considerable factor in the downgrade, suggesting reduced investor confidence. The analyst added, “**The market seeks visibility toward double-digit growth, but my analysis indicates this is likely for 2025 with a substantial surge in appliance revenue.**”

The Role of Infinity and Future Projections

Liani acknowledges the positive contribution of Infinity, which currently accounts for 15% of total revenue, suggesting some long-term growth resilience. He expects maintenance revenue to rise from ~2% to 3.5% year-over-year in 2025, primarily driven by Infinity-related professional services. However, even with this contribution, the analyst remains unconvinced that this will be enough to offset the overall slower growth and justify the current valuation. With the stock up 37% over the last 12 months and trading at 15 times forward EV/FCF with mid-single-digit growth, Liani argues there’s limited further upside. This led him to adjust estimates and lower the price target based on 16 times the 2026E EV/FCF multiple, down from 18 times for 2025.

Management’s Outlook and Geographic Considerations

Check Point’s management acknowledges weakness in the European market but anticipates a billings recovery in the fourth quarter, projecting 7.1% growth. However, Liani’s analysis suggests this recovery may not be enough to alter the overall assessment of moderate growth, emphasizing that **”despite substantial investment in product updates…and go-to-market efforts, overall growth remains limited to mid-single digits.”** This modest trajectory, according to Liani, directly constrains the stock’s upside potential until a more robust growth outlook emerges.

Conclusion: A Cautious Outlook for Check Point

The downgrade by BofA Securities underscores the challenges Check Point faces in achieving the market’s expectations for significant revenue growth. While the company has invested heavily in new technologies and market strategies, the results have yet to translate into the substantial, double-digit growth anticipated by many investors. The analyst’s lowered price target and neutral rating reflect a cautious outlook, suggesting that investors should temper their expectations for substantial short-term gains. The company’s ability to accelerate growth and improve margins remain key factors determining any future upward revisions to the stock’s rating. The key takeaway is that despite meeting current expectations, analysts are concerned about future performance, creating uncertainty for investors.

Article Reference

Lisa Morgan
Lisa Morgan
Lisa Morgan covers the latest developments in technology, from groundbreaking innovations to industry trends.

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