The upheaval in the markets and the downgrading of analysts' recommendations pushed Check Point's share price down 5.2% to below $100 in the past two days of trading for the first time since July 2018. Check Point's current market cap is $15.3 billion.
Goldman Sachs downgraded its recommendation for Check Point's share to "Sell" on Thursday, and cut its target price for the share from $118 to $100. At the same time, Goldman Sachs upgraded its recommendation for FireEye, another cybersecurity company, from "Neutral" to "Buy," and retained its "Buy" recommendation for the share of Palo Alto Networks, following the RSA Security conference in San Francisco. Goldman Sachs's analysts said that attendance at the conference was significantly less than in previous years because of concern about the coronavirus. The analysts said that the growing concern about the Covid-19 virus was enhancing awareness of the cloud's utility in business continuity.
"On the back of virus-assisted global macro concerns, stocks within our coverage universe have pulled back materially over the past few weeks," Goldman Sachs's economists wrote. "However, we believe that a portion of the decline is due to concern about fundamental weakness driven by expectations of lower growth ahead."
Goldman Sachs is not attempting to estimate how long the downward pressure caused by macroeconomic conditions will last, but it expects business weakness because of canceled conferences, flights, and meetings. The firm nevertheless believes that the cybersecurity sector offers exposure to growing technology, and to the part of enterprise budgets least expected to be affected.
While Goldman Sachs's attitude towards Palo Alto, FireEye, and Fortinet was positive, the firm's view of Check Point was less positive. "Check Point's stock has been trading below long-term historical averages, as product revenue declines have weighed on the shares. While software subscriptions have grown double-digits, investors have expressed concern over maintenance growth, which accounts for a substantial portion of Check Point's revenue, and maintenance revenue remains at risk of the company continues to lose market share," Goldman Sachs writes.
Goldman Sachs says that Check Point has better "support" than its competitors in a turbulent market, because cofounder and CEO Gil Shwed has a large stake in the company, its profit margins are high, and its free cash flow is strong. They add, however, that operating profit margins narrowed, and the company's guidance includes hiring marketing and sales personnel, which will increase its expenses in this sector in the coming years. Goldman Sachs comments that according to its data, Check Point is losing market share, with no improvement in sight at this stage. "Considering this, along with the fact that the stock has declined less than better performing peers during the most recent market pullback, we believe other within our coverage universe are better positioned for upside into the second half of 2020," Goldman Sachs states.
Published by Globes, Israel business news - en.globes.co.il - on March 8, 2020
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