Fortinet's (NASDAQ:FTNT) revenue growth rates could be set up to slow down. And if that's the case, investors are left with a choice. Is paying up 37x next year's non-GAAP EPS all that compelling? And I don't know the answer to this question.
I guess it depends on whether the Fed deems it necessary to stop raising rates as quickly. But even this line of thought illustrates that Fortinet's valuation isn't that amazing.
To help me drive my point, here's a quote from the earnings call that lays out everything investors need to know,
[...] we remain on track to achieve all of our medium-term financial targets from our May 2022 Analyst Day, including $10 billion in billings and $8 billion in revenue in 2025, each representing a 22% three-year CAGR from the midpoint of our 2022 guidance.
Management clearly stated that it's going to exit 2022 growing at close to 32% CAGR and that in the next 3 years its CAGR gets down to around 22%. Even if there's a substantial amount of conservatism baked in, we are nevertheless forced to question, what's a fair growth rate for 2023?
Investor trepidation is now starting to creep into valuations. For a long period of time, cyber security companies were deemed to be recession-proof. Not only are investors now a lot more skeptical, but it also appears that even ''recession resistant'' could now involve substantial qualifiers around it.
To get to my point, consider what Fortinet's CEO stated on the call,
We expect fourth quarter ending backlog to be relatively consistent with the third quarter backlog as we are seeing early signs of a transition back to more normalized customer buying behaviors.
Within that paragraph, we see the news that investors didn't want to hear, ''more normalized customer buying behavior''.
And that's a theme that is percolating throughout enterprise tech. Tech had been seen as the trade to be in, during a recession. And within tech, cyber security was seen as a safe haven. And now? Well, perhaps this trade became a tiny bit too crowded for what it is.
That being said, to be clear, it's absolutely not all bad news when it comes to Fortinet.
Fortinet's revenue growth rates continue to point to a mid-30% CAGR. For a cybersecurity firm that has seen its share price mostly move down for the bulk of 2022, one has to question, whether investors may not be too negative about Fortinet's prospects?
For their part, analysts remain positively bullish on Fortinet's prospects. Even as cyber security and enterprise SaaS companies generally speak of the tough macro environment, Fortinet's analysts continue to revise their revenue estimate outlook upwards.
With this in mind, let's discuss one blemish in the bull thesis.
During the three and nine months ended September 30, 2022, Fortinet repurchased 10.2 million and 36.0 million shares of its common stock, respectively, at an average price of $49.15 and $55.37 per share, respectively, and for an aggregate purchase price of $500.0 million and $1.99 billion.
And now see if you see a pattern here:
It appears to me that as the share price is moving lower, this coincides with the total amount deployed towards share repurchases coming lower. That being said, there's still a further $530 million left for share repurchases. So it could be the case that these share repurchases could end up being accretive to long-term shareholders.
Altogether, as we look ahead to Q4 2022 this translates into the total share count ending the year down 4.2% y/y.
The problem that investors are facing right now, is that there's so much uncertainty over what will FTNT's 2023 revenue growth rates normalize at? On the one hand, we have management openly stating that customer behavior is normalizing.
On the other hand, FTNT's GAAP margins are extremely enticing. In fact, as a point of reference, Q3 2022 reported 23.1% GAAP margins, an increase of 390 basis points from 19.2% reported in the same period a year ago.
On yet the third hand, we have to highlight that the bulk of the revenue growth is coming from its Product business line. And many investors are skeptical that Product revenues will continue to be a growing TAM over the next few years.
Optically Fortinet is cheap. Why? Because it has GAAP earnings. Something that many tech companies haven't figured out yet, how to get their business to report GAAP profits.
On the other hand, a large proportion of its growth is not coming from its Service unit, but instead from its Product business. As a point of reference, two years ago, Fortinet's product business made up approximately 34% of its total revenues. While for its most exact quarter, its Product business makes up 41% of its total revenues.
So, it could be that soon 50% of Fortinet's business could be coming from its Product business, with a very limited TAM.
According to one study, cybersecurity attacks globally have risen by 32% year over year and there are over 1,200 attacks per week. This is no surprise given the increase in the use of technology and the rise of remote working which has widened the attack surface. Therefore it is not surprising that the cybersecurity industry was valued at $139 billion in 2021 and is forecasted to grow at a rapid 13.4% compounded annual growth rate, reaching a value of $376 billion by 2029. Fortinet is in a prime position to benefit from this growth trend as a leader in firewalls. The company has recently posted strong financial results for the third quarter of 2022, beating both top and bottom-line estimates. In this post, I'm going to break down the company's business model, financials, and valuation, let's dive in.
Fortinet (NASDAQ:FTNT) has created a "Security Fabric" which aims to converge multiple cybersecurity solutions into a single platform. This includes Fortinet Threat Intelligence, Cloud Security, Zero Trust Access, Network Security and more. The company competes with companies such as Check Point (CHKP) and Palo Alto Networks (PANW) in its Cloud Security Segment. While the business also competes with Zscaler (ZS) for its Zero Trust access offering. "Zero Trust" is a network access methodology that aims to deliver users the "least privileged access" to only the applications they need. This stops hackers from entering a company's network via a harmless application before moving laterally to the financial applications.
Fortinet is a Gartner leader in its Next Generation Firewall solution and won the customer choice award in 2022. In addition, the company is the market leader in firewalls with its products making up 37% of all units shipping in 2021.
Fortinet reported solid financial results for the third quarter of 2022. Starting with Billings, which is the amount invoiced to customers and the true "top line" for SaaS companies. Billings increased by 32.6% year over year to $1.41 billion. Following on from this revenue was $1.15 billion, which increased by a rapid 32% year over year and beat analyst estimates by $25.59 million.
Total revenue was driven by solid product revenue growth of $468.7 million which increased by 39% year over year across its Core and Enhanced Platform technology products. This is impressive growth given a tough year-over-year comparison and supply chain challenges. Service revenue also increased by a solid 28.4% year over year and 3% sequentially to $680 million.
There are three drivers which are helping to accelerate revenue growth across its product range. These include the increase in cybersecurity threats (as mentioned in the introduction), the merging of security and networking, and vendor consolidation. For a long time, the cybersecurity industry has been categorized by a variety of single-point solutions and specialist companies. This was great in the short term as each company had its own expertly honed product. However, for IT and security teams the security tech stack has become unmanageable with high operational overhead. For example, internal security will have to manage patches, updates, licenses, etc. on many different solutions.
Fortinet solves this problem with its "platform strategy" which enables customers to "converge" together both networking and security products, resulting in lower management time and lower operating costs.
A Forrester report even highlighted this and labeled Fortinet as a leader in enterprise firewalls for the first time. The report stated, "Fortinet has built a flexible and capable platform" and it "excels at performance for value".
The company has continued to eat market share in the area of Secure SD-WAN (Wide-Area-Network) which increased bookings by 45% year over year. Management believes the company is on track to become the market share leader in this space over the next couple of years.
Fortinet has also been "growing upmarket" as it executes its strategy of targeting higher-order value enterprise customers. In the third quarter of 2022, the number of deals over $1 million increased by over 80% to 153 deals.
Fortinet is well diversified with the Americas making up 40.7% of revenue followed by EMEA at 38.6% and APAC at 20.75%. EMEA was surprisingly the fastest growing segment as revenue increased by 37% year over year. This was followed by the Americas with 34% revenue growth and the APAC region with 23% growth.
On to profitability and margins, the company reported $875.5 million, in gross profit which increased by 32% year over year at a solid 76.2% gross margin. Operating Income was $334.9 million, which increased by blistering 45% year over year. This was driven by a solid improvement in operating margin from 25.8% to 28.3%, as the company benefited from higher operating leverage and FX tailwinds.
Earnings per share were $0.29, which beat analyst expectations by $0.06.
Fortinet has also reported solid growth in its cash flow which increased by 19.9% year over year to $463.8 million, including real estate add-backs.
The company has a solid balance sheet with cash, short-term investments, and marketable securities of $1.81 billion. In addition, the company has ~$989 million in long-term debt.
In order to value Fortinet I have plugged the latest financials into my advanced valuation model which uses the discounted cash flow method of valuation. I have forecasted a conservative 30% revenue growth for next year, which is lower than the 34% guidance for the full year of 2022. In addition, I have forecasted 32% revenue growth per year over the next 2 to 5 years in order to be conservative.
In order to increase the accuracy of the valuation, I have capitalized R&D expenses, which has lifted the net income. In addition, I have forecasted the company to continue to increase its operating margin to 27% over the next 8 years, as it continues to benefit from strong operating leverage.
Given these factors I get a fair value of $52 per share, the stock is trading at $77.87 per share at the time of writing and is thus 33% undervalued.
As an extra data point, Fortinet trades at a Price to Sales ratio = 10 which fairly valued relative to historic multiples. It should be noted that Fortinet trades at a slightly higher PS multiple than industry Peers but the company does have strong profit margins which aren't factored in via the PS metric.
The high inflation and rising interest rate environment is squeezing the margins of many businesses and analysts are even forecasting a recession. Therefore I expect longer sales cycles and delayed spending although the cybersecurity industry does look to be relatively immune from many of the major headwinds.
Fortinet is a solid technology innovator and has a diversified business model. The company has highlighted the problems in the market with multiple vendors and aims to help the industry consolidate. It is growing strong across all product lines and the stock is undervalued intrinsically.
For years, Fortinet has leaned on its custom security and networking ASICs to compete against rival vendors like Juniper, Palo Alto Networks, and Cisco in the firewall space.…
But when it comes to extending their security stack to the cloud, any advantage offered by its custom silicon starts to erode. Fortinet can’t exactly deploy its hardware in the cloud. Instead, it’s forced to — like most other vendors — run its firewall on general-purpose compute infrastructure, which has traditionally meant x86 CPUs from Intel or AMD.
Fortinet’s latest attempt to sell customers on its cloud firewalls involves repackaging its security stack as a software-as-a-service platform in AWS. Dubbed FortiGate CNF, the service features the standard assortment of security functionality you’d expect from a next-generation firewall, including URL, DNS and application filtering and intrusion prevention/detection to name a few.
However, unlike most virtualized or containerized firewalls, Fortinet’s kit is designed to take advantage of Amazon Web Services (AWS) own custom silicon in the form of its Graviton GPUs.
AWS began offering Arm-based VMs with the launch of Graviton in 2018. Rather than trying to out-perform x86 CPUs from Intel or AMD, the Graviton sought to achieve better value. Amazon claims its third-gen Graviton CPUs offer 40 percent better price-to-performance than “comparable fifth-generation x86-based instances.”
In a similar vein, Fortinet went out of its way to avoid the syllabu of performance in its announcement. It’s an uncharacteristic move for a company that rarely misses an opportunity to call out the performance gap between its appliances and that of its competitors. Instead, the vendor highlighted the consistent management experience and touting lower operating costs associated with running its software stack on Amazon’s Arm-based CPUs.
Lower operating costs have been a hallmark of Arm CPUs, as cloud providers attempt to attract customers to the architecture. When Oracle introduced its Ampere Altra-based instances it did so at $0.01 per core per hour.
Whether Fortinet somehow managed to achieve consistent performance across on-prem and cloud deployments by going the cloud native route or opting for Amazon’s Arm cores remains unclear. Pressed on any performance delta between its on-prem and cloud capabilities, Fortinet provided the following vague statement. “We’re running FortiGate-VMs that deliver very-high firewall throughput performance.”
Each customer is assigned its own VM that’s autoscaled to as demands change, Fortinet tells The Register. And a peek at AWS Graviton instances offers some clues as to what the upper limits of Fortinet’s new cloud firewalls may be. Amazon’s largest Graviton instance — the 64-core, 128GB c7g.16xlarge — maxes out at 30Gbps of network bandwidth.
That would put the maximum threat inspection on par with the FortiGate 3000F — a high-throughput firewall appliance aimed at hyperscale environments — but that’s assuming that the CPU can actually keep up. And even if it could, it wouldn’t be cheap. At $2.7/hour plus $0.031 per gigabyte inspected, 30Gbps worth of data flows would run a customer somewhere in the neighborhood of $420 an hour.
With that said, there’s still some merit to maintaining a consistent security stack across on-prem and cloud infrastructure.
While all the major cloud providers offer some kind of firewalling functionality in house, employing them usually requires maintaining two separate security policies. Microsoft’s security wing this summer attributed 80 percent of ransomware attacks back to configuration errors.
Extending an enterprises’ existing security stack to the cloud to minimize this potential has been a major selling point behind any number of virtualized or containerized firewalls, including those from Juniper, Palo Alto Networks, and in this case Fortinet. ®
Make no mistake, cybersecurity is a secular growth trend. As computing technology deepens its roots in the global economy, businesses have new opportunities ahead of them -- but they're simultaneously faced with new dangers too. The pandemic accelerated reliance on digital processes, which has in turn boosted demand for cybersecurity.
But that hasn't equated to shareholder gains. Take Fortinet (FTNT -1.53%), for example. It's the second-largest cybersecurity pure-play stock (as measured by revenue, behind only Palo Alto Networks), and shares are down 30% so far in 2022 as the bear market rages on. Business itself is booming, though. Is this a once-in-a-decade buying opportunity for this long-term growth story?
Fortinet's third-quarter revenue increased nearly 33% year over year to $1.15 billion -- driven by a 39% increase in product sales ($469 million) and a 28% increase in services ($681 million). Earnings per share jumped 65% to $0.33, and free cash flow was up 20% to $395 million (for a very healthy free-cash-flow margin of 34%).
Why is the market so down on Fortinet? Just like last quarter, free-cash-flow growth came in a bit light. That's a function of Fortinet's spending this year on research and development, as well as a sizable expansion of its sales and marketing team. The company sees big opportunities ahead of it (more on that in a moment), so it's keeping the foot on the gas to hold onto some of its momentum. With global economic conditions worsening, that's making some investors a bit nervous.
It isn't just the third-quarter free cash flow that's a problem for the market, though. After two years of accelerating growth in Fortinet's hardware sales, CFO Keith Jensen said on the earnings call the company is "seeing early signs of a transition back to more normalized customer buying behaviors."
What does that mean? Well, back in 2019 before the pandemic, revenue for Fortinet's product and services segments increased a respective 17% and 21%. While that's respectable, it's far lower than the full-year 2022 outlook for revenue to increase about 33% from 2021 (at the midpoint of guidance). If customer buying "normalizes" to a pre-pandemic pace, Fortinet is poised for a big deceleration in the next few years.
Worries aside, there is still plenty to like about Fortinet at this juncture. The company benefits from a type of cybersecurity flywheel effect. Once Fortinet's security equipment is installed, customers usually begin to pay for ongoing software and services attached to the hard asset. That means Fortinet's rapid rise in product sales this year should lead to a nice tail of service sales growth in the next few years -- even as product sales ease up.
Additionally, Fortinet has been investing heavily into new services in areas like employee endpoint protection (a must-have for remote workers) and providing various network security technologies from a single platform (from mobile 5G network operators to more traditional networks). CEO Ken Xie said this has led to expanding relationships with existing customers, especially as larger organizations look for more simplicity by consolidating the number of security vendors they use.
With that as the backdrop, Fortinet doesn't see a slowing economy -- perhaps even a recession -- as a significant risk to the medium-term guidance it laid out in May 2022. Specifically, management expects to reach $8 billion in revenue by 2025 (which would work out to a 22% average annual growth rate from today), and a 2025 free-cash-flow margin roughly in line with where it is now. Additionally, Fortinet has returned $2.56 billion to shareholders over the last 12-month stretch via share repurchases. Balancing profitable growth with shareholder returns will remain the focus going forward.
Fortinet stock now trades for 43 times expected 2022 adjusted earnings, or 35 times trailing-12-month free cash flow. With growth still going strong and a possible rebound in profitability in store next year as Fortinet's heavy rate of investment spending eases, it isn't an unreasonable price tag. The stock's fall this year doesn't exactly spell once-in-a-decade opportunity. However, if Fortinet achieves its goals, this remains a top buy among cybersecurity stocks in my book.
Cybersecurity firm Fortinet Inc. today announced the availability of FortiGate Cloud-Native Firewall on Amazon Web Services Inc., a managed next-generation service specifically designed for AWS environments.
FortiGate CNF incorporates FortiGuard artificial intelligence-powered Security Services for real-time detection of and protection against malicious external and internal threats. Underpinned by FortiOS, Fortinet’s network operating system, the service is said to deliver a consistent network security experience across AWS and on-premises environments.
Fortinet is pitching the service as allowing customers to focus more on their core competencies and deploy effective security policies to protect their business-critical applications and data. Natively supporting AWS, FortiGate CNF gives customers immediate access to FortiGuard AI-powered Security Services for enterprise-grade protection, including URL filtering, DNS filtering, IPS, application control and other FortiGuard security services that organizations rely on.
Benefits include regionwide network protection at optimized costs, with FortiGate CNF designed to aggregate security across cloud networks, availability zones and virtual private clouds in a cloud region. FortiGate CNF natively supports AWS to optimize cloud security spending and uses AWS Graviton instances to deliver better price-performance than other offerings.
Network security operations with FortiGate CNF offer a simple, intuitive user interface that minimizes the need for security expertise, with support for defining and deploying robust security policies such as dynamic meta-data-based policies on AWS. The AWS support helps security teams move at the speed and scale of applications teams and the support of AWS Gateway Load Balancer eliminates do-it-yourself automation and helps secure Amazon Virtual Private Cloud environments. Additionally, support for AWS Firewall Manager simplifies security management and automates security rollouts.
As part of the Fortinet Security Fabric platform, the new service also offers a single pane of glass through FortiManager to centralize policy management, increase visibility and automate policy enforcement on AWS and beyond.
“Organizations that are accelerating their cloud adoption may not have the resources or time to build, scale or adapt their cloud security to meet the pace of their business,”explained John Maddison, executive vice president of products and chief marketing officer at Fortinet. “As a managed next-generation firewall service, FortiGate CNF removes the heavy lifting around network security operations and provides a frictionless experience to help customers easily deploy best-in-class security on the cloud.”
Fortinet CNF is available now in the AWS Marketplace.
Cybersecurity stocks took a tumble Wednesday morning, and that's kind of strange.
Reporting third-quarter earnings after close of trading last night, CrowdStrike Holdings (CRWD 0.80%) easily topped analyst expectations for both sales and earnings, reporting a $0.40 per share pro forma profit, where the Street predicted only $0.31, and with sales of $580.9 million eclipsing expectations for only $573.8 million. CrowdStrike even guided investors to expect a second earnings beat in the fourth quarter, saying its earnings could top expectations by more than $0.10 per share this quarter.
CrowdStrike's stock is down regardless, falling 19.5% through 11:10 a.m. ET. What's more, it seems to be pulling industry leader Palo Alto Networks (PANW -1.01%) down 2.3% as well. On the plus side, Fortinet (FTNT -1.53%), which was down as much as 2.2% earlier in the day, has trimmed its losses to just 0.4%.
So what exactly is going on here? If CrowdStrike beat earnings in Q3 -- and promised to do it again in Q4 -- then why is its stock down? And if CrowdStrike's news was good, what sense does it make for Palo Alto and Fortinet stocks to be falling because of it?
Let's dig into the numbers. CrowdStrike grew its quarterly sales 53% year over year in Q3. Non-GAAP (adjusted) earnings (the aforementioned $0.40 per share) more than doubled year over year. The bad news is that according to generally accepted accounting principles (GAAP), earnings were actually negative $0.24 per share -- about 10% worse than a year ago. (On the plus side, free cash flow for the quarter was $174 million, a quarterly record for CrowdStrike.)
Still, on balance, that sounds pretty good, and CrowdStrike did say that earnings (albeit pro forma) will be even better in Q4. On the other hand, management noted that its net new annual recurring revenue (ARR) was a bit weaker than expected in Q3, impacting Q4 sales, which are predicted to top out around $628 million -- a few million short of Wall Street's prediction. Management further warned that ARR in Q4 could be as much as 10% below Q3 levels.
This, it appears, it's the prediction that spooked the stock market this morning, and caused CrowdStrike stock to sell off so hard.
Why is this a concern? Well, consider that in its entire lifetime as a publicly traded company, CrowdStrike has still never earned a GAAP profit (and isn't expected to start earning profits before 2026, according to estimates collected by S&P Global Market Intelligence). And even valued on free cash flow, by which measure CrowdStrike is already profitable ($621 million generated over the past 12 months), CrowdStrike stock sells for a pricey 52-times-FCF valuation. As such, CrowdStrike's valuation seems heavily dependent upon its expected growth rate. It stands to reason that any hint that growth might begin to falter is going to have an outsize effect on the stock's price -- just as we're seeing today.
That being said, at last report analysts were still forecasting strong 40.5% annualized long-term profits growth for CrowdStrike. That's not quite fast enough to make me call an FCF valuation of 52 cheap, but it's getting close. Compared to the alternatives, I certainly think CrowdStrike stock looks more attractively valued than Fortinet at 33.6 times FCF today, with a 23% projected growth rate.
Still and all, if you're looking for the best bargain in cybersecurity stocks today, I think Palo Alto Networks is your best bet. At 29% projected long-term growth, Palo Alto is growing quickly, yet doesn't have nearly so high a bar to clear, as CrowdStrike does, to meet Wall Street expectations, limiting the chance of an earnings miss. And at a valuation of only 21.5 times FCF, Palo Alto Networks is a much cheaper stock than Fortinet or CrowdStrike.
Long story short, CrowdStrike may look like the best target of opportunity after today's near-20% collapse in price. But Palo Alto Networks is still a better value stock for cybersecurity investors.
It has been about a month since the last earnings report for Fortinet (FTNT). Shares have added about 20.6% in that time frame, outperforming the S&P 500.
Will the exact positive trend continue leading up to its next earnings release, or is Fortinet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most exact earnings report in order to get a better handle on the important catalysts.
Fortinet Inc. reported third-quarter 2022 non-GAAP earnings per share (EPS) of 33 cents, which topped the Zacks Consensus Estimate of 27 cents. The bottom line improved 65% from the year-ago quarter’s earnings of 20 cents per share.
Total revenues of $1.15 billion beat the Zacks Consensus estimate of $1.12 billion and improved 32.6% year over year. The top line was driven by strong demand for the company’s FortiGate technology, which includes a security processing unit, an integrated Security Fabric platform and hybrid multi-cloud offerings.
Strategic investments in developing powerful products and services and efforts in expanding into the adjacent addressable markets and boosting the firm’s global sales force aided Fortinet’s quarterly performance.
Segment-wise, Product revenues jumped 39% year over year to $468.7 million. This upside can be attributed to the continued adoption of the FortiGate-based secure SD-WAN solution, as well as strong revenues of non FortiGate products and increased demand for integrated security fabric products.
Services revenues climbed 28.4% to $680.8 million.
Billings were up 32.6% to $1.41 billion on solid execution and growth across all regions.
As of Sep 30, 2022, deferred revenues were $4.19 billion, up 35% year over year.
Geographically, the EMEA region registered the highest top-line growth with a 37.3% increase, followed by the Americas’ 33.6% and APAC’s 22.7%.
During the September-end quarter, the company secured 153 total deals worth $1 million or more each. Secure SD-WAN continued to be the leading contributor to growth in terms of the number of deals worth more than $1 million in the quarter.
The non-GAAP gross margin contracted 30 basis points (bps) year over year to 76.2% in the third quarter of 2022. This reflects an expansion of 30 bps in the Product gross margin while Services gross margin remained flat.
Non-GAAP operating income jumped 45.3% to $324.9 million in the reported quarter, while non-GAAP operating margin increased 250 bps to 28.3%.
Fortinet exited the third quarter with cash and cash equivalents and short-term investments of $1.70 billion, down from $1.73 billion reported at the end of second-quarter 2022.
During the reported quarter, FTNT generated operating and free cash flow of $483 million and $395.2 million, respectively. During the first nine months of 2022, the company generated an operating cash flow of $1.20 billion.
In the third quarter, the company bought back $500 million worth of shares and in the first nine months of 2022, it bought back $1.99 billion worth of shares.
Fortinet issued impressive guidance for the fourth quarter and raised the same for the full-year 2022. For the fourth quarter of 2022, the company estimates revenues in the range of $1.275-$1.315 billion. Billings are estimated to be $1.665-$1.720 billion.
Non-GAAP gross margin is expected in the range of 75-76%, while non-GAAP operating margin is anticipated between 30% and 31%. Non-GAAP EPS is projected at 38-40 cents.
For 2022, Fortinet predicts revenues in the band of $4.410-$4.450 billion, up from the prior estimate of $4.350-$4.400 billion. However, billings are now expected in the range of $5.540-$5.595 billion compared with the earlier range of $5.560-$5.640 billion.
Non-GAAP EPS is now anticipated between $1.13 and $1.15, up from the previous range of $1.01-$1.06.
Non-GAAP gross margin and operating margin are now expected in the bands of 75-76% and 26-27%, respectively.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
The consensus estimate has shifted 14.85% due to these changes.
At this time, Fortinet has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Fortinet has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Fortinet is part of the Zacks Security industry. Over the past month, Check Point Software (CHKP), a stock from the same industry, has gained 7.7%. The company reported its results for the quarter ended September 2022 more than a month ago.
Check Point reported revenues of $577.6 million in the last reported quarter, representing a year-over-year change of +8.2%. EPS of $1.77 for the same period compares with $1.65 a year ago.
Check Point is expected to post earnings of $2.35 per share for the current quarter, representing a year-over-year change of +4.4%. Over the last 30 days, the Zacks Consensus Estimate has changed 0%.
Check Point has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.
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Zacks Investment Research
Fortinet (FTNT) has recently been on Zacks.com's list of the most searched stocks. Therefore, you might want to consider some of the key factors that could influence the stock's performance in the near future.
Over the past month, shares of this network security company have returned +20.6%, compared to the Zacks S&P 500 composite's +5.9% change. During this period, the Zacks Security industry, which Fortinet falls in, has gained 1.5%. The key question now is: What could be the stock's future direction?
While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.
Earnings Estimate Revisions
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.
We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
For the current quarter, Fortinet is expected to post earnings of $0.39 per share, indicating a change of +56% from the year-ago quarter. The Zacks Consensus Estimate has changed +14.9% over the last 30 days.
The consensus earnings estimate of $1.15 for the current fiscal year indicates a year-over-year change of +43.8%. This estimate has changed +14.8% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $1.38 indicates a change of +20.6% from what Fortinet is expected to report a year ago. Over the past month, the estimate has changed +6.5%.
Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the exact change in the consensus estimate, along with three other factors related to earnings estimates, Fortinet is rated Zacks Rank #2 (Buy).
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Revenue Growth Forecast
Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.
In the case of Fortinet, the consensus sales estimate of $1.29 billion for the current quarter points to a year-over-year change of +34.2%. The $4.43 billion and $5.37 billion estimates for the current and next fiscal years indicate changes of +32.5% and +21.4%, respectively.
Last Reported Results and Surprise History
Fortinet reported revenues of $1.15 billion in the last reported quarter, representing a year-over-year change of +32.6%. EPS of $0.33 for the same period compares with $0.20 a year ago.
Compared to the Zacks Consensus Estimate of $1.12 billion, the reported revenues represent a surprise of +2.37%. The EPS surprise was +22.22%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.
No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.
While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Fortinet is graded D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Fortinet. However, its Zacks Rank #2 does suggest that it may outperform the broader market in the near term.
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Fortinet, Inc. (FTNT) : Free Stock Analysis Report
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The University of Tasmania has partnered with security firm Fortinet by joining the Fortinet Academic Partner Program, aimed at building a diverse, skilled workforce to help close the cybersecurity skills gap.
The program will begin in Semester 1, 2023 and the University of Tasmania is the 498th education institution globally that has implemented the Fortinet Academic Partner Program, and the 16th in Australia.
As part of the Fortinet Training Institute, the Academic Partner Program works with academic institutions worldwide to create a more diverse, equitable, and inclusive cybersecurity workforce by increasing access to training courses to address the global talent shortage.
Fortinet says the program bridges the gap between learning and careers through access to industry-recognised Fortinet Network Security Expert (NSE) training and certification courses.
The Fortinet Academic Partner Program collaborates with higher education institutions and schools around the world to prepare students to become skilled cybersecurity professionals.
At the University of Tasmania, the program will be provided to students in several forms: as part of the ICT curriculum for high achievers/Honours students; as a short course for undergraduate/diploma students or school leavers; and, significantly, to people outside the sector that are looking to reskill, return to work, or switch careers.
According to the Fortinet 2022 Cybersecurity Skills Gap global research report, 80 per cent of organisations worldwide suffered one or more breaches that they could attribute to a lack of cybersecurity skills and/or awareness - (i) Closer to home, the Fortinet Networking and Cybersecurity Adoption Index found that only 41 per cent of organisations considered themselves highly resourced to protect data assets and IT infrastructure. (ii) Further, the (ISC)² Cybersecurity Workforce Study suggests the global cybersecurity workforce needs to grow 65 per cent to effectively defend organisations’ critical assets. (iii)
The Head of the School of ICT at the University of Tasmania, Professor Anna Shillabeer, said, “As part of my work here, we undertook a rethink of what is required to build capability and digital skills. We identified that there are pockets of Tasmania’s IT with significant capabilities; however, there is also a skills shortage that needs to be overcome, especially in cybersecurity, to better cope with demand.
“The Fortinet Academic Partner Program is continuously updating its training with content that is relevant and dynamic for the issues and challenges cyber professionals face today. It is so important that we offer current skills for our students to ensure they are workforce ready.
“This new offering will significantly benefit the Tasmanian industry in all sectors, as students will now enter the workforce with qualifications as well as cybersecurity certifications. Additionally, Tasmanians that have developed life skills in the workforce in alternative sectors will be able to use their certifications to assist with finding employment in IT and cybersecurity roles.”
Dale Nachman, Country Manager – Australia, Fortinet, said, “Fortinet recently surpassed the milestone of issuing one million NSE certifications globally. Partnerships with universities, such as the University of Tasmania, are key to Fortinet’s mission to close the cyber skills gap. The cyber threat landscape continues to grow in both volume and sophistication and having trained professionals to help governments and enterprises Excellerate their cyber resilience will be critical.
“Through the Fortinet Academic Partner Program, the University of Tasmania will be able to provide leading industry cybersecurity training and certification. Graduates of the program will have in-demand cybersecurity skills to help protect networks from global cyber threats, such as phishing attacks, ransomware, and business email compromise. Fortinet is committed to supporting Tasmania, and Australia more broadly, with the development of cybersecurity professionals. Working with the University of Tasmania is a critical part of this.”