Is Check Point Software’s Stock Dip an Opportunity?

Check Point Software Technologies‘ (NASDAQ:CHKP) stock market rally was brought to an abrupt halt last month after the company released its second-quarter results. Though the cybersecurity specialist beat Wall Street estimates for revenue and earnings, investors were disappointed by guidance that turned out to be worse than expected.

But the dip in the company’s share price could be an opportunity for those looking for a solid long-term play on cybersecurity. Here’s why.

A hacker in a hoodie sitting with a laptop.

Weak Q3 outlook is a calendar thing

Check Point Software expects its third-quarter revenue to fall between $430 million and $465 million, the midpoint of which is lower than the consensus expectation before earnings of $463 million. Additionally, the company expects earnings in the range of $1.18 to $1.28 per share ($1.23 at the midpoint), while the Wall Street estimate was $1.27 per share.

The Israel-based company’s management is putting the blame for the weak guidance on Yom Kippur, which happens to fall on the last day of the quarter. “During Yom Kippur, the entire country is at a complete shutdown, and we won’t be able to operate any business activities,” said CEO Gil Shwed during the latest conference call. “Given that and the fact that usually a substantial amount of business arrives in the last day, that may result in a significant shift in revenues despite our effort to manage the process.”

Check Point generated over $30 million in revenue during the closing days of the second quarter. So it isn’t surprising to see why it expects a slowdown during the third quarter.

But the good news is that Check Point hasn’t changed its full-year guidance, which means that the company expects business to just shift from one quarter to the next.

Subscription revenue growth has picked up impressive pace

Check Point Software’s software blades subscription business jumped an impressive 27% year over year to $112 million during the second quarter, leading to overall revenue growth of 8%. The company’s spending on software blades subscriptions was about 3.6% of revenue from the segment, much better than the 19% in the products and licenses segment. So Check Point Software’s subscription business will boost the company’s margin profile as its contribution to overall revenue grows. The subscription business now accounts for just over a quarter of the company’s revenue as compared to less than 22% in the prior-year period.

More importantly, further growth in the subscription business will also boost Check Point’s software updates and maintenance business. This will lead to recurring revenue in the long run without any additional spending on customer acquisition. In fact, the growing contribution from the company’s subscription business helped keep the increase in its operating expenses last quarter to just 7.7% after two years of double-digit growth.

Attractively valued

Check Point Software Technologies’ recent dip has made the stock cheap when compared to the overall industry. Its trailing price to earnings (P/E) ratio of 23 is lower than the industry’s median P/E ratio of 26.6. Furthermore, the stock’s forward P/E ratio of 18.6 indicates that its bottom line is expected to get stronger in the future.

What’s more, this cybersecurity play doesn’t have any debt, while it has a strong cash position of $1.6 billion. By comparison, peers such as FireEye and Palo Alto Networks have substantial debt  . Therefore, Check Point has the option of tapping the debt markets in a bid to boost its spending on marketing or research and development, which will eventually enhance its earnings in the long run.

Investors, therefore, shouldn’t get carried away with just one bad outlook as Check Point Software is pulling the right strings.