Has the cybersecurity bubble burst?

Gil Shwed  photo: Tamar Matsafi
Gil Shwed photo: Tamar Matsafi

In October Check Point CEO Gil Shwed warned of a bubble in the cybersecurity sector, recent market falls seem to have vindicated his cautious approach.

Last October Check Point Software Technologies (Nasdaq: CHKP) CEO Gil Shwed told "Bloomberg" that there was a bubble in the cybersecurity sector and that he was in no rush to acquire startups with the $4 billion in cash at his disposal.

Shwed was defending himself from fierce criticism by analysts and investors over Check Point’s sluggish performance, at a time when online security was the hottest sector. While the Nasdaq and tech world was surging ahead due to the shift online during the Covid pandemic, Check Point had been losing ground in recent years, and then had a market cap of about $16 billion.

After having been the most valuable Israeli company since the demise of Teva in late 2017, Check Point also suddenly found itself overtaken by a cluster of Israeli tech companies, including veteran business services company NICE Technologies, solar energy company SolarEdge, website builder Wix, and work operating system platform monday.com. To really rub salt into the wound, another Israeli cybersecurity company SentinelOne, which held its Wall Street IPO in June 2021, had also surged past Check Point in value.

Together with Shlomo Kramer and Marius Nacht, who have since left the company to focus on other business interests, Shwed cofounded Check Point back in 1993, when the Internet was still in diapers. In the Israeli Defense Forces 8200 intelligence unit, Shwed had worked on securing classified networks and with this background experience, Check Point was able to pioneer such products as Firewall protection and Virtual Private Networks (VPNs).

Despite these breakthrough successes, Shwed has frequently come under fire for his conservative stewardship of Check Point. In particular, former senior executive Nir Zuk, who left Check Point and later founded cybersecurity company Palo Alto Networks in 2005, has been critical of Shwed’s reluctance to embark upon aggressive expansion. Even after recent market falls, Palo Alto Networks has a market cap of $50.26 billion - triple that of Check Point even though Palo Alto was founded 12 years after Shwed’s company. Zuk once told "Globes," "I see no logic in Check Point losing market share and still putting its emphasis on profit."

Nevertheless, over the past few months, there have been advantages to Shwed’s cautiousness, as the tech sector has plunged. Investors are looking for value companies that make a profit. While lossmaking SentinelOne’s market cap has fallen more than 50% since Shwed’s October warning about a cybersecurity bubble, and virtually every tech company has seen its valuation slashed, Check Point’s market cap has risen to $16.82 billion.

When Wall Street had its worst day in almost a year yesterday, Check Point’s stock rose 2.43%, boosted by solid fourth quarter results, in which the company beat the analysts’ expectations in revenue and profit.

Check Point is also once again Israel’s most valuable company, having raced past even a veteran value tech company like NICE Systems, which currently has a market cap of $15.8 billion.

It still remains to be seen whether a bubble has burst or whether the past few months have simply been a major correction. Shwed may not be adventurous but he is shrewd and this week he bought Israeli startup Spectral, which extends cybersecurity to the code development stage and becomes part of the company’s expansion into cloud security. No financial details about the deal were disclosed but market sources believe that Check Point is paying $60 million. With valuations of tech companies having fallen in the current market climate, Shwed has likely gotten himself a bargain.

But while Shwed may be laughing now, it is unclear whether he will have the last laugh. The shift online is irreversible and the need for ever more sophisticated cybersecurity systems is certain to continue and this could undermine Shwed’s cautiousness as a viable long term strategy.

Published by Globes, Israel business news - en.globes.co.il - on February 4, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Gil Shwed  photo: Tamar Matsafi
Gil Shwed photo: Tamar Matsafi
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