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Stock Strategist

Check Out Check Point

The pre-eminent network security vendor should benefit from cybersecurity consolidation.

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 Check Point Software Technologies (CHKP), an Israel-based network security incumbent, has adapted its product portfolio in recent years to strategically position itself as enterprises migrate toward hybrid cloud environments. Its expertise in software-defined security environments, relative to peers’ reliance on physical infrastructure, should result in margin expansion.

As mobile and cloud become more important for customers, the potential vectors of attack become increasingly serpentine, which we think could expand Check Point’s market opportunity. Check Point excels because of its large-enterprise-focused model and a broad product portfolio, yielding high renewal rates and a growing recurring revenue base. Further, we think the company’s ability to churn out new offerings allows it to meet the rapidly evolving technological needs of its client base. Check Point continues to earn exemplary marks in its threat detection rates from independent reviews. We estimate that nearly 70% of the company’s revenue is recurring, and we see switching costs from its mission-critical security offerings for sprawling enterprise clients whose demands necessitate a vendor with ubiquitous solutions like Check Point. The company’s focus on software blade subscriptions (suites of integrable software products that can be selected or deselected based on the client’s preference) sold into the enterprise allows Check Point to extract respectable pricing from clients and post outstanding gross and operating margins.

William Fitzsimmons does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.