🤑 Thriving Stock, Thriving Sector

Grand View Research estimates the cybersecurity market will achieve a compound annual growth rate of 12.3% from 2023 to 2030.

It’s a hot sector, at least according to our proprietary Trackstar data, which showed a massive jump in search volume for Fortinet (FTNT) among financial pros.

Typically, daily search volume for the stock is around 30 searches.

A recent spike saw 335 in one day.

According to its latest earnings report last week, the company grew revenues 32% in 2022 and had a record $1.45 billion in free cash flow. 

Trackstar shows it’s among the most popular cybersecurity stocks. 

Yet many traders lump it in with other tech momentum names, many of which got pummeled in recent months.

When we dug into the financials, we decided that wasn’t fair.

Fortinet’s Business

Fortinet is a leading provider of network security systems that defend against cyber threats. It provides an integrated and comprehensive security platform that defends organizations, networks, clouds, and endpoints.

It delivers multilayered security, including firewalls, virtual private networks (VPNs), intrusion prevention, anti-malware, web filtering, and more.

It sells its products to organizations of all sizes. It uses a direct sales model in addition to its channel partner network,. They which consists of value-added resellers, system integrators, and managed service providers.

Fortinet also generates income by supplying its customers with technical assistance and maintenance services, including professional services, security assessments, architectural design services, training and education programs, and certification services. 

Some of its more prominent clients include AT&T, Coca-Cola, HSBC, American Express, FedEx, and Toyota.

Fortinet reported product revenue of $540.1 million in Q4 2022, up 43% year over year. Its service revenue of $742.9 million in Q4 2022 was up 27% YoY. 

Source: Fortinet 

Fortinet’s billings of $5.59 billion in Q4 2022 rose 34% YoY. 

The company has been profitable and free-cash-flow positive every year since its IPO in 2019, something not common among IPOs and SPACs of its generation. 

Financials

Source: Stock Analysis 

Despite taking its revenues from $1.49 billion in 2017 to $4.09 billion in the trailing 12 months (TTM), the company maintained high profit margins. 

It believes the convergence of security and networking and the consolidation of products and vendors put it in an excellent position to maintain its growth trajectory. 

Fortinet’s diluted earnings per share has risen from $0.04 in 2017 to $0.91 TTM. The company’s EBIT margin has improved substantially over the years, from 8.3% in 2017 to 20.1% TTM. 

Fortinet also reported a record free cash flow of $1.5 billion in 2022. Plus, it has a strong balance sheet, with $2.2 billion in cash and $990.4 million in debt. 

Valuation

Source: Seeking Alpha

Many companies in the cybersecurity sector are growing fast but have yet to reach profitability. That’s not the case with FTNT. It’s been GAAP profitable for 14 consecutive years.  

FTNT trades at a P/E GAAP ratio of 60.4x, significantly better than peers Palo Alto Networks (PANW), CrowdStrike Holdings (CRWD), and Zscaler (ZS), all of which aren’t GAAP profitable. But FTNT is relatively more expensive than VMware (VMW), which trades at a P/E GAAP ratio of 35.5x. 

FTNT’s enterprise value divided by EBITDA ratio is 49.5x, notably lower than PANW at 385.1x, CRWD at NM (not meaningful), and ZS at NM. VMW has the lowest among the group at 21.2x.

FTNT has a price-to-cash-flow ratio of 29.9x, lower than CRWD at 31.8x and ZS at 54.1x, but higher than VMW at 13.2x and PANW at 19.1x. 

Profitability

Source: Seeking Alpha

While all the companies in the group have high gross profit margins, only two have positive net income margins. 

FTNT is the most profitable, with a net income margin of 18.1%, followed by VMW at 10.7%, while PANW is at -27.9%, CRWD is at -8.7%, and ZS is at -30.2%. 

Fortinet’s management is highly effective. The company’s EBIT margin of 20.1% is the highest among the group, followed by VMW at 16.3%, PANW at -1.6%, CRWD at -7.2%, and ZS at -26.4%.

Growth

Source: Seeking Alpha

Fortinet has simultaneously grown revenues and expanded margins, a rare feat these days. 

The company’s revenue growth of 31.1% YoY is greater than VMW’s 4.4% and PANW’s 27.7%. CRWD and ZS had higher revenue growth, 58.3% and 59.8%, respectively. But neither of them is profitable yet. 

In addition, FTNT’s EBITDA growth is 36.7%, compared to VMW at -9.9%, PANW at NM, CRWD at NM, and ZS at NM. 

Our Opinion 8/10

Fortinet’s free cash flow jumped 48% YoY in 2022. As we noted, the company has been profitable for 14 consecutive years. It’s rare to find a profitable cybersecurity company growing at FTNT’s rate.  

The stock makes for a compelling investment at these levels and should provide excellent returns for investors for years to come.