Checkpoint Software Helps Cyber Security Stocks Bottom

Key Points

• Checkpoint Software had a better-than-expected quarter but gave light guidance. 
• The company is still forecasting growth but earnings may take a hit. 
• Analysts' support is helping to drive the stock higher. 

While 2023 is not shaping up to be as strong as the analysts had initially hoped, results from Checkpoint Software NASDAQ: CHKP confirm news released by F-5 Networks NASDAQ: FFIV and Cloudflare NASDAQ: NET: 2023 won’t be as bad as it could have been. The takeaway from all this is that analysts have been hesitant to alter their long-term forecasts without the latest news from the underlying companies.

The news from the companies is that growth is still on the table, albeit at a slower pace than before. This means that there will be some revisions to the earnings outlook, but the market for these stocks is bottoming because the absolute worst was priced in, and that’s not what we’re looking at. 

Checkpoint Software Has Strong Quarter, Issues Light Guidance 

Checkpoint Software ended 2022 on solid footing and is guiding the market for growth in 2023. The problem is that outlook for revenue, which is above the Marketbeat.com consensus, is offset by a weak EPS forecast that may keep the shares moving sideways over the next quarter or so. The Q4 results, on the other hand, were strong on the top and bottom lines and are underpinning the price action now. 

The $638 million in revenue is up 7% YOY and driven by a 13% increase in subscription revenue coupled with a 10% increase in deferred revenue. The best news is that margins expanded versus last year, leaving the GAAP operating margin at 40% and the adjusted margin at 45%.

This produced $2.45 per share, up 9%, and outpaced the top line by 200 basis points. As for the guidance, the company expects to see revenue growth of 8% for calendar 2023, which matches the growth in 2022. The bad news is that adjusted EPS is expected to be near $7.40 versus the $8.13 Marketbeat.com consensus estimate, but the figures may not be directly comparable. 

Checkpoint Software Increases Capital Returns 

Checkpoint Software’s cash flow and FCF were lower this quarter than last year, but this is due to 1-off factors, including acquisition costs and FX-hedging transactions that do little to impair the company’s financial standing. The company has a leverage ratio below 1 and triple-digit coverage, so it is among the best-positioned tech companies from the balance sheet perspective.

The company does not pay a dividend but wants to repurchase shares and announced a new $2 billion authorization to keep it buying shares for at least the next 5 quarters. Under the plan, the company can buy $0.325 billion worth each quarter. 

The share repurchase plan is only one tailwind supporting the stock price, and the analysts are another. The 21 analysts tracking the stock have it pegged at a firm Hold that has not budged in the last 12 months, but the price target has. It should be noted that sentiment is impacted by 2 recently initiated targets that come with Neutral ratings.

Without those, the bulk of recent activity is bullish and would have the consensus sentiment at a Moderate Buy otherwise. The price target implies only a 10% of upside for the stock, but it has been trending higher all year and may continue to do so in the near to short term as well. 

The Technical Outlook: Checkpoint Is Bought On The Dip 

The price action in Checkpoint Software fell back to support at the $125 level following the Q4 release, but this move has been used as a buying opportunity by the market. The stock price has been moving steadily since the open and crossed into positive territory less than 2 hours after the market opened.

If the stock can maintain this momentum and close at or near the highs of the day this stock will most likely move sideways within the established range. If not, the market may retest support at $125 and move even lower. Other cybersecurity stocks like DataDog NASDAQ: DDOG and Palo Alto Networks NASDAQ: PANW will report later this week and month and may lend additional support to the entire complex.