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3 Reasons This Stock Is a Top Cybersecurity Pick

Check Point Software Technologies (NASDAQ: CHKP) has turned out to be an underwhelming cybersecurity bet in 2019 when compared to its more illustrious peers. Weak sales execution and unattractive growth have hampered Check Point's momentum, while the company's safety-first approach in a cutthroat cybersecurity industry has also dented its prospects.

CHKP Chart

CHKP data by YCharts.

But things are changing for the better at Check Point Software. Its software-based revenue is ticking up and the company has taken steps to supercharge its growth in the long run. In fact, it wouldn't be surprising to see Check Point becoming a top cybersecurity pick in the future. Here are three reasons why you should consider going long Check Point stock.

Hacker in a hoodie sitting with a laptop.

Image source: Getty Images.

Pulling the right string for long-term growth

You can see in the chart above that Check Point's top-line growth has been tepid. The story was no different in the company's fiscal 2019 Q3 results: Revenue increased just 4% year over year to $491 million. But the more important thing to note was that Check Point's deferred revenue grew at a much faster pace of 8% year over year to $1.24 billion.

Deferred revenue is the money collected by a company in advance for services that will be rendered at a later date. The deferred revenue amount sits on a company's balance sheet as a liability when it is collected, and moves to the income statement once the actual delivery of services takes place. So deferred revenue gives us an idea of where a company's business is headed, especially if it is involved in selling subscriptions.

The fact that Check Point's deferred revenue is outpacing its actual revenue growth means that the company is signing up more subscription customers. The numbers show that's exactly what happened in the third quarter. Check Point's subscription business clocked 13% year over year growth to $153.9 million, thanks to an uptick in the adoption of its cloud solutions.

The security subscription business now accounts for just over 31% of Check Point Software's total revenue, compared to 29% in the prior-year period. Meanwhile, revenue from software updates and maintenance also increased slightly on a year-over-year basis to $218.7 million. The growth of these software-centric businesses was enough to help Check Point offset the decline in its products and licenses segment.

More importantly, the company enjoyed much higher margin in the security subscription business. The cost of revenue in this segment was just $6 million as compared to nearly $21 million in the products and licenses business. So the software business is generating higher revenue at a much lower cost base for Check Point when compared to the legacy business of selling products and licenses.

This is great news for Check Point, as the security subscription business still has a lot of room for growth.

Stepping on the gas

Check Point Software has been known for its conservative approach in a highly competitive cybersecurity market, but that's changing now. It looks like the higher margin of its subscription business has encouraged the company to go on the offensive as far as spending on marketing and research and development is concerned.

Check Point's research and development expenses increased 20% year over year while selling and marketing expenses rose nearly 10.5%. Both of these metrics outpaced the company's actual revenue growth. In fact, Check Point has stepped up its investment in both of these line items in the past year or so, and the positive impact is visible on the company's subscription growth.

CHKP Research and Development Expense (% of Quarterly Revenues) Chart

CHKP Research and Development Expense (% of Quarterly Revenues) data by YCharts.

The company is now looking to get into lucrative cybersecurity niches as well. Check Point recently announced the acquisition of Internet of Things (IoT)-focused cybersecurity start-up Cymplify. Check Point will integrate Cymplify's expertise into its Infinity cybersecurity architecture so that clients can protect their IoT devices -- such as smart TVs, medical devices, and IP cameras -- against cyberattacks.

This should open up a big growth opportunity for Check Point because according to IHS Markit, cybersecurity is the fastest-growing IoT niche. The firm predicts that the IoT data security market will grow from $3 billion in revenue this year to $7 billion in 2022 as more original equipment manufacturers (OEMs) move to secure their IoT devices.

Attractive valuation

Check Point Software's trailing price-to-earnings (P/E) ratio of 23 and forward earnings multiple of 19 are quite attractive by cybersecurity industry standards.

CHKP PE Ratio (TTM) Chart

CHKP PE Ratio (TTM) data by YCharts.

Given that Check Point is now looking to boost revenue through the higher-margin subscription business, the company should be able to deliver sustained earnings growth in the future. What's more, investors shouldn't rule out the possibility of a much stronger top-line performance from Check Point now that it is stepping on the gas in lucrative markets such as IoT.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool has a disclosure policy.

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

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