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The company offers its proprietary products which defend against cyberattacks. These services include firewall, anti-malware, virtual private networks (VPN), anti-spam, filtering, and many others. It also offers endpoint protection and wireless networking solution. The company operates in both hardware and software.
Cybersecurity is on everyone’s mind lately. Governments, businesses large and small, schools, hospitals, and our personal devices are all targets of bad actors. Because of its wide breadth of services, profitability, and worldwide footprint, Fortinet stock has performed incredibly well for shareholders recently, and could continue its success.
I am neutral on FTNT stock. (See Fortinet stock charts on TipRanks)
Growing Worldwide TAM
Fortinet has certain advantages over some of the newer cloud cybersecurity stocks on the market such as CrowdStrike (CRWD), Cloudflare (NYSE:NET), and Zscaler (NASDAQ:ZS).
First, it is established and quite profitable, while the others are still spending a very large portion of their revenues on customer acquisitions and are not expected to be GAAP profitable for several years.
Next, Fortinet has a worldwide footprint rather than receiving the vast majority of revenue from one geographical location.
For Q2 FY21 Fortinet received just 42% of its revenue from the Americas. The remaining was 38% from Europe, the Middle East, and Africa (EMEA), along with 20% from the Asia Pacific region (APAC). CrowdStrike, by contrast, received 72% of its revenue just from the United States in its fiscal Q2.
The ability to operate worldwide provides Fortinet with a vast and growing total addressable market (TAM). The company predicts that its TAM will reach $107 billion by 2024. As the company had $2.6 billion in total revenue in fiscal 2020, there is obviously ample room for growth.
The newer entrants to the cybersecurity fray mentioned above also present a risk. These upstarts have developed and are developing SaaS platforms and innovative technologies to take on the legacy players, and are growing revenues rapidly. Fortinet must continue to advance in order to hold its position.
Profitability in a Growth Sector
Another positive in the Fortinet column is that it is GAAP profitable, and cash flow positive.
Fortinet has exceptional gross margins that hover around 77-79%. This healthy margin has allowed the company to scale to profitability, and post a 25.4% operating margin in Q2 FY21.
Along with this, FTNT stock trades at more conservative valuations than the peers mentioned previously. FTNT stock trades at a forward price-to-sales (PS) ratio of 13.1x, while the others each trade over 32x.
This is a reflection of their intense growth rates, and future potential. Fortinet is lower risk and more stable. However, it likely has less upside potential.
Wall Street’s Take
Wall Street analysts are somewhat bullish on FTNT stock, with a Moderate Buy consensus rating, based on nine Buy, eight Hold, and no Sell recommendations.
The average Fortinet price target of $309.53 implies 3.5% upside potential.
Summary on Fortinet
Fortinet continues to post impressive margins and higher profits quarter after quarter.
The company’s TAM is vast, growing, and demand is quite strong in the industry.
Fortinet is a more stable play than some of its high-growth peers who have yet to post profits. However, likely has less upside as a legacy player.
Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.
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