Check Point's Security Solutions Bode Well, Risks Persist - Analyst Blog


On Jun 27, 2014, we issued an updated research report on Check Point Software Technologies Ltd. ( CHKP ).

Check Point is a well-known provider of information technology (IT) security solutions globally. Sophisticated cyber threats significantly affect financials, brands and reputation of enterprises. Consequently, cyber security is becoming a mission-critical, high-profile requirement. Check Point's wide experience in the security space and consistent delivery of such solutions will help it to maintain and grow its market share.

Per a new report from the market research firm IDC, corporate spending on threat intelligence security services will reach $1.4 billion in 2018 from an estimated $905.5 million in 2014. These predictions bode well for Check Point which recently launched ThreatCloud IntelliStore, a threat intelligence marketplace enabling enterprises to choose from various customized threat neutralizing solutions. The company has also partnered with the likes of iSIGHT Partners, CrowdStrike and IID to provide best-in-class cyber security solutions by leveraging its own expertise and its partners' solutions.

Check Point's timely product launches as well as product refreshes also validate its endeavor to provide new and improved solutions. The company has witnessed a growing demand for its data center applications such as the new 21700 Appliances and the 13500. Moreover, the 21000, 13000 and 61000 high-end appliance series (running on blade architecture) have gained traction. Going forward, we believe that Check Point will incrementally benefit as customers upgrade to the software blade architecture related to Threat Emulation, Application Control and Compliance, and the subsequent updated versions.

Among other factors, Check Point's revision of its share buyback plan to $200 million per quarter (aggregate of $1.0 billion) from $135 million per quarter will also bode well for its earnings.

Nonetheless, Check Point competes with numerous big and small companies in the security application market. According to IDC, Check Point secured the second position in the worldwide security appliance revenues in the first quarter of 2014. Check Point trailed industry leader Cisco ( CSCO ) and was followed by Fortinet ( FTNT ).

However, among the top three vendors, only Check Point's market share contracted on a year-over-year basis (from 12.9% in first-quarter 2013 to 12.8% in  first-quarter 2014) and recorded the lowest year-over-year revenue growth (7.7% year-over-year growth).

Moreover, we believe that Check Point's dominance could be challenged by new entrants. This could lead the company to resort to competitive pricing to maintain and capture further market share.

Additionally, Check Point is largely dependent on indirect channels for selling its products. The company derives a significant portion of the total sales from the 10 biggest distributors. We believe that this level of dependence increases concentration risk. If these distributors reduce their purchases due to supply chain or competitive issues (focusing on sales of the products of competitors), Check Point's business would be adversely affected.

Currently, Check Point has a Zacks Rank #3 (Hold). Investors may consider a better-ranked stock like Micron Technology ( MU ) sporting a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: IT , CHKP , CSCO , MU , FTNT

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