Morgan Stanley Downgrades Check Point Software, Sees 'Absolute Downside Risk'

In a report published Wednesday, Morgan Stanley analysts downgraded the rating on

from Equal-weight to Underweight. The price target was maintained at $73. The analysts believe that there is "absolute downside risk" to the share price. Although the company posted strong results for 2014, driven by favorable security demand, Morgan Stanley surveys indicate that the fire refresh cycle is peaking. Although Check Point has been increasing investment to sustain growth, the analysts believe that it might be too late, given that there appears to be some share losses in the firewall segment, as well as limited traction in other categories. "Current investments likely won't be productive for sometime, which means EPS growth will likely slow in FY15. We continue to look for a high-single digit EPS CAGR through FY17," the analysts said. In addition, subscription billings growth weakened in 2014, which the analysts believe will be reflected in the subscriber revenue for FY15. Given that about 82 percent of Check Point's revenue came from product sales and maintenance in FY14, a slowdown in refreshes, along with the stable to declining market share, are likely to make it more difficult for the company to sustain growth on FY15. "With the firewall refresh cycle peaking, subscription revenue growth likely to slow and margins moving lower, we see risk of slowing EPS growth at CHKP," the analysts added.