Check Point Software Technologies Pulls Back After Earnings Beat

Cloud-Security Leader Check Point Software Technologies Is A Long-Term Winner

The price action in shares of Check Point Software Technologies (NASDAQ: CHKP) has been very iffy of late. The stock is stuck inside a major trading range and the Q1 results aren’t helping matters. While not bad, the Q1 results failed to inspire bullishness and have shares moving lower in the wake of the report. The takeaways for investors, however, are that this leader in cloud-security is well-positioned for the post-pandemic world, sitting on a large stockpile of cash, and expected to grow by high-single-digits to low-double-digits over the next decade or so. In that light, we view this stock as a solid buy but you might want to wait a bit before taking a nibble. 

Check Point Software Beats Consensus, Barely 

Check Point Software Technologies had a good quarter but one that gave the market little reason to be excited. As good as it is, the $508 million in net revenue is only up 4.5% from last year and beat the consensus by a mere 100 basis points. And the comp wasn’t that hard to beat, nor was the analyst’s consensus, a consensus that hasn’t budged in many, many months. Basically a good report but not an inspiring one.

Moving down the report, there is some better news.  The company reports rising demand in all segments and an increase in deferred revenue that suggests the business is accelerating. While revenue grew 4.5%, deferred revenue grew by 8% from last year and indicates sequential revenue growth is on tap. 

Other good news in the report includes widening margins. The company’s GAAP and adjusted operating margins improved over the past year contrary to expectations and helped provide leverage in the bottom-line results. The adjusted operating margin came in at 49% versus the 47.2% consensus estimate and last year’s 48% to drive better than expected earnings. On the bottom line, GAAP and adjusted earnings both grew nearly 10% and beat the consensus targets by a wider margin than revenue. The GAAP $1.33 beat by $0.03 or about 2.3% while the adjusted $1.54 beat by $0.04 or about 2.65%. 

Check Point Doesn’t Pay A Dividend, But It Buys Back Shares 

Check Point Software is not a dividend-payer but that doesn't matter, the company is a committed buyer of its own shares and has ample cash flow to keep doing so long into the future. Over the past quarter, the company bought back 2.7 million shares for a total of $325 million or about 85% of free cash flow and w think that pace is sustainable. Not only is the company on track to grow, but the balance sheet is a fortress with over $4 billion in cash and liquidity and virtually no debt. Based on the outlook for revenue and earnings, we believe the buybacks will not only continue at the same or similar pace but the outlook for accelerated purchasing is also present. 

The Technical Outlook: Check Point Technologies Is Reversing Within Its Range 

Shares of Check Point Software are pulling back by nearly 2.0% following the release of the Q1 results but this is a buying opportunity. The price action is range-bound over the last few months but showing signs of reversing within the range with a double-bottom reversal pattern. The post-earnings action has the stock down at the short-term moving average and testing the baseline of the double-bottom. If support is confirmed at this level we see price action moving back up within the range and retesting the all-time high within the next 2 or 3 months. If not, then Check Point may retest support at the $110 level before renewing its sideways-to-upward trajectory.