Meet the Earnings Beast of Cybersecurity Stocks
A Bird’s Eye View of Cybersecurity
When cybersecurity stocks ran out of gas in 2015, many investors wrote them off as a waste of time. That appears to have been a GIGANTIC mistake.
New cyber attacks occur on a weekly basis, and they are growing ever more destructive. The Equifax hack, for instance, exposed 143 million accounts to the wilderness known as the dark web.
So much of the data that Equifax Inc. (NYSE:EFX) collects while calculating credit scores—names, dates of births, social security numbers—was pilfered with light-fingered contempt.
Or how about the global ransomware attack that took place a few months before? The one in which a virus known as “WannaCry” infected 300,000 computers, holding them hostage until funds were paid in cryptocurrency.
It was stopped by sheer luck, when a security analyst accidentally “cut the red wire,” but it won’t be the last of its kind. And we may not get so lucky next time.
No wonder cybersecurity stocks jumped as much as seven percent the next day…
Companies have finite budgets, which means there is a priority list for funding. Cybersecurity doesn’t rank very high on that list. But it rises a few spots with each cyber attack.
Fear is the ultimate catalyst for cybersecurity stocks.
CHKP Stock Is a Cash Cow
If you wanted to go long on the cybersecurity mega-trend, but you’re scared of volatility, then it makes sense to go with an established player. Maybe one that even makes profits.
Also Read: Three Top Cybersecurity Stocks for 2017
But, to be entirely honest, there aren’t many profitable cybersecurity stocks.
Some of the bigger defense stocks, like Northrop Grumman Corporation (NYSE:NOC) and Lockheed Martin Corporation (NYSE:LMT), have juicy bottom lines. But they aren’t pure-play cybersecurity stocks. So what are we left with?
My mind immediately jumps to Check Point Software Technologie Ltd. (NASDAQ:CHKP).
This $18.5-billion company is streets ahead of its rivals in the earnings department. Moreover, CHKP stock has racked up nearly 50% returns over the last 12 months.
Chart courtesy of StockCharts.com
But these gains are just a warm-up act.
It’s only a matter of time till some whiz-kid sitting alone in a basement creates WannaCry 2, or WannaCry 3, or WannaCry 4, or…something we haven’t seen yet. What happens then?
My guess is that there will be a lot of worried faces in corporate boardrooms. Men dressed in gray suits, with even grayer hair, will gather, speak in hushed voices, and decide that “something” must be done.
That’s usually when cybersecurity spending becomes a priority.
It costs a little bit of cash, sure, but nothing that wouldn’t otherwise be stolen from the company.
In the long run, they’ll realize that paying for cybersecurity might actually save them money. And who better than Check Point to protect them?
Check Point is a full-service cybersecurity firm, protecting against ransomware and other digital threats. It also provides threat intelligence services, which is essentially a consulting business latched onto its software business.
And here’s a quick look at its financial highlights (for Q2 in 2017):
- Revenue: $459.0 million, up eight percent year-over-year
- GAAP Net Income: $188.0 million
- Diluted GAAP Earnings per Share: $1.12, up 18% year-over-year
- Cash Flow: $226.0 million, up 10% year-over-year
- Cash Balances: $3.81 million
(Source: “Check Point Software Technologies Reports Second Quarter 2017 Financial Results,” Check Point Software Technologies Ltd., July 20, 2017.)
Check Point is so cash-rich that it acts like an elder statesman, buying back $248.0 million worth of stock in the second quarter of 2017. That limit was recently increased to $250.0 million per quarter because business is booming for Check Point.
You know what the rarest investment opportunity in the world is? A profitable company that’s sitting on a mega-trend, while trading at only 24-times its earnings. That is the stuff of dreams.
If someone told me about a stock like that, I’d call my broker immediately.
Add on a share repurchase program worth $1.0-billion a year, and I’d back up a Brink’s truck just to buy a few shares. Right now CHKP stock is in that sweet spot.
Its share price can easily triple as cybersecurity stocks become more valuable, but you won’t have to wait for that rally with a company that’s bleeding cash. Check Point is making money hand over fist.
Put another way, you’ll get paid to hold a stock that can potentially surge 100% to 200%. Why would anyone say no to that?