Check Point: Initiating Coverage With Narrow Moat Rating and Fair Value of $150; Shares Undervalued

We are initiating coverage on Check Point Software Technologies CHKP with a narrow moat rating and $150 fair value estimate. Our fair value estimate is equivalent to a P/E multiple of 19 times, slightly above its historical average. We are slightly below FactSet consensus on our near-term estimates, yet our fair value estimate is higher than the stock price and consensus sell-side target price. We surmise that we are more optimistic than the market on the success of Check Point’s Infinity cybersecurity platform. Consequently, at current levels the shares look undervalued with a 4-star rating.

Check Point is a leading vendor in the cybersecurity market and has transformed from its roots as a firewall pioneer into an enterprisewide security provider. Compared with its competitors, Check Point is more conservative with its operating and capital investments, which leads to peer-leading operating margins and a strong balance sheet, but its growth is lagging.

The company’s narrow moat is based on switching costs, primarily in the network security/firewall business, which accounts for about two thirds of revenue. Cybersecurity is mission-critical for any firm and firewall network security is at the core of any company’s cybersecurity defense plan. A firewall works by following a set of rules to determine what traffic is allowed to pass in and out of the network. As a company grows, these rules begin to multiply and become increasingly complex. Consequently, some large firms have more than a million rules in their firewall network. These rules cannot be easily ported to a different firewall vendor if a company wants to switch firewall providers. Therefore, a company that is tempted to switch to another firewall vendor has to consider the likelihood that it may need to completely recreate its set of firewall rules that may have been built over decades.