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VPN woes drag down Check Point

Shares fall after a Lehman Brothers analyst says the company could be hit by increasing competition and a glitch that caused it to miss out on three big deals recently.

Check Point Software Technologies fell Wednesday after a Lehman Brothers analyst said the Israeli network security company could be hit by increasing competition and a glitch that caused it to miss out on three big deals recently.

Shares were off $4.60, or 8 percent, to $50.30. In April the company reported first-quarter earnings that beat expectations, but the company's stock fell sharply amid investor worries about sluggish U.S. technology spending.

Otherwise, shares have been holding up well, as the company is considered to be insulated from the economy along with other companies in the crucial security business.

Lehman Brothers analyst Israel Hernandez downgraded the stock to "buy" from "strong buy" and lowered his 12-month price target to $70 from $110 based on four primary reasons.

Increasing competition from Cisco and others in the service-provider virtual private network (VPN) market could be a problem over time. Check Point's main business is providing the firewalls to give business clients VPNs, which allow for secure internal and remote communications.

The company was also absent from three major service-provider deals announced last week, which "suggest(s) Check Point is at competitive disadvantage in the high-end VPN market," Hernandez wrote.

WorldCom announced that it had selected Cisco for its first customer-managed VPN; Juniper announced three new service-provider wins at Global Crossing, Yipes and Intellispace; and Exodus, a Web-hosting provider, awarded a VPN deal to Nokia.

Not only was Check Point absent from the deals, it was shafted by three companies to which it had already provided firewall services, said Hernandez.

Recent bankruptcies in the service-provider channel also put the companies' future revenue at risk, Hernandez said. Several companies that were resellers of Check Point's products have gone out of business recently, including Winstar, which just filed for bankruptcy, and the Salinas Group.

Hernandez also noted that recent price promotions suggest that near-term customer demand remains an issue, reducing the ability to gauge revenue expectations over the near term.

But other analysts, who remained bullish on the stock, didn't see anything to be concerned about.

"We don't believe investors should be alarmed by these promotions, as the magnitude of the discounts is exaggerated by clever marketing on the part of Check Point to convince customers they're receiving significant cost savings," wrote First Union International analyst Christopher Russ in a recent report which reiterated his "buy" rating.