Check-in with Check Point Software for blue-chip cyber strength

Key Points

• Check Point Software had a better-than-expected quarter that has analysts raising their ratings. 
• Growth is slow but steady and fueling a healthy share repurchase program. 
• The company repurchased 6.65% of shares over the last year, helping to sustain its uptrend. 

Check Point Software NASDAQ: CHKP is not a high-flying hyper-growth story but a solid, blue-chip name in cybersecurity. It produces growth, but slowly. The more attractive feature is its cash flow and share repurchasing power. Check Point Software is a cash flow engine that drives shareholder value. The company uses its money to invest in new growth, build cash flow, and repurchase shares, which have kept the market in a steady, if volatile, uptrend for over a decade.

Check Point Software bought back $325 million worth of shares in Q3. This has the share count down a whopping 6.6% compared to last year, and repurchases can be expected to continue falling over time. The company extended its repurchase plan by $2 billion earlier in the year and can buy back up to $325 million per quarter, enough for another six quarters. 

Check Point grows, leverages buybacks to grow EPS

Check Point Software had a decent quarter, with two strong segments offsetting weakness in one. The company's net revenue topped $596 million to grow 3.2% compared to last year, beating the Marketbeat.com consensus estimate by 50 basis points. Breaking revenue down by segment, Subscription revenue led with a gain of 15%, trailed by a 1.7% increase in Software Updates and Services, the largest segment by far. Product and License revenue fell by 13.7% but not enough to offset strength in other areas. 

Margin news is favorable. The margin was steady and flat on a GAAP and adjusted basis to leave adjusted EPS up 17% YOY. This is a full nickel ahead of consensus, primarily due to share repurchases and a lowered share count. 

The company didn't give any guidance, but the outlook is stable. The company posted a 4% increase in deferred revenue, suggesting a low-to-mid-single-digit growth pace will continue. This aligns with the analysts' consensus estimates, improving their sentiment. 

Check Point Software gets upgraded following Q3 release

The analysts like what they see in Check Point's earnings release. The news catalyzed one price target increase and one upgrade to Neutral from Underweight. This has the consensus sentiment firming to a more solid Hold with a price target of about 5% above current action and relatively flat over the last year. In the words of Piper Sandler analysts Rob Owens and Ethan Weeks, incremental improvements and signs of demand have improved confidence in the outlook. 

Morgan Stanley, which upgraded the stock before the earnings release, thinks Check Point's revenue outlook is stable compared with others in the group, with a chance of outperformance relative to consensus. Recent acquisitions have increased the product portfolio and allowed ample opportunity for cross-selling and upselling. In their view, the bull-case scenario is $175 or above the current high-price target and 30% above the current share price. 

The technical outlook: Check Point Software's uptrend is intact

The price of CHKP fell in early trading but quickly recovered and moved higher. The 2.75% move shows solid support at the 150-day moving average, consistent with the uptrend. If the market follows through on this signal, the stock price should continue higher and test recent highs near $138 soon. In this scenario, a move to new highs will likely follow. If not, the market could be range-bound at current levels until the next earnings cycle. 

Analysts have already begun to raise the bar for Q4. They see revenue rising about 3.7% at the midpoint, potentially setting the bar high. However, the earnings consensus expects adjusted EPS to be flat compared to last year, which does not factor in the margin stability or share repurchases. There is a high probability that Check Point will significantly outperform the bottom line estimate in Q4 if there is no more change in the consensus.