Bernstein analyst Pierre Ferragu went into detail in a note on Tuesday as to why he sees Check Point Software Technologies Ltd. (CHKP) stock as being massively overvalued.
After initiating coverage on the cybersecurity sector about two weeks ago, CHKP was one of two new initiations. The other was Palo Alto Networks (PANW), which was given an “Outperform” rating and a $200 price target, implying a 29% rally was in store for it.
Check Point was not so lucky.
Ferragu and his team gave the Tel Aviv, Israel-based cybersecurity company an “Underperform” rating and a $65 price target, which implies downside of 22% from yesterday’s close of $83.25.
But why? What’s so wrong with CHKP stock?
4 Reasons to Sell CHKP Stock
Bernstein has four “key convictions” that lead to Check Point’s miserable “Underperform” rating. The first is about the nature of the cybersecurity biz:
“Conviction #1: In security, platform plays a role, but innovation is mostly about making existing platforms obsolete and, as such, drives structural market fragmentation…an installed base can drive sustainable and profitable revenues, but may not grant any share of incremental dollars spent.”
Then, a fundamental dig on CHKP in particular:
“Conviction #2: Next generation firewalls drive excellent growth, but the majority of this growth is being captured by new entrants.
“New entrants (e.g. Palo Alto) have effectively brought-to-market next generation firewalls integrated with endpoint protection and cloud services, gaining strong momentum: Fortinet and Palo Alto combined capture ~70% of the growth of the market, Check Point only 14% …”
Point #3 is a bit disturbing as an investor, because it basically pertains to Check Point’s brand image:
“Conviction #3: Check Point’s deficit in commercial performance is apparent. It is very likely to be more the consequence of perceived performance of the technology than real and objective performance issues …”
“Based on interviews with IT decision makers, and more quantitative research, we conclude with a high level of conviction that Check Point’s technology is perceived as lagging in today’s market.”
Finally, a note on CHKP stock’s valuation: Ferragu and his team expect Check Point’s top line growth to decelerate due to heightened competition in the coming years. So …
“In that context we see valuation progressively heading towards levels in line with more mature tech companies, from ~11x EV/EBIT today, to ~9x, implying a target price of $65.”
Point taken.
Bernstein is simply not a fan of CHKP stock, and it gave you four compelling reasons why. If you’re understandably still curious about smart ways to invest in the cybersecurity area, though, remember there’s always Palo Alto Networks, which Bernstein believes can be picked up at a great value today.
As of this writing, John Divine was long AMZN. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
