Fortinet (FTNT 4.91%) occupies a leadership role in the growing cybersecurity industry. The stock has retreated from its year-to-date high, prompting some investors to consider it a good company at a discounted price. If the company's competitive advantages and growth prospects are strong enough, this stock could deliver impressive gains over the next five years.
A broad and respected offering
Fortinet is a major player in the cybersecurity industry with a broad portfolio of products and services. It has three major segments:
- Secure networking
- Secure access service edge (SASE)
- Security operations (SecOps)
Secure networking includes the firewall, malware prevention, threat detection, and related software products. This segment also contains network hardware, such as switches, routers, and security appliances. Secure networking is Fortinet's most mature segment. It accounts for nearly 70% of its revenue, and it has the slowest revenue growth rate.
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Fortinet's SASE category accounts for nearly 25% of its revenue, and it's expanding rapidly. The company reported 24% year-over-year growth in service revenue last quarter, and it's forecasting 18% compound annual sales growth over the next five years.
Security operations are a combination of outsourced security and IT staffing services. These provide a more comprehensive approach to monitoring, threat detection, and tech management that appeals to organizations lacking the scale to maintain internal teams. SecOps contributes less than 10% of Fortinet's total revenue, but it's a relatively high-growth portion of the business. It's a natural fit with the rest of the company's portfolio of products and services, and it helps the company retain and expand customer relationships.
Fortinet's offering is well-positioned among its peers. Industry analysts consider the company's core network security segment a leader. Fortinet holds its own against high-profile competitors, such as Cisco Systems, Juniper Networks, Hewlett Packard Enterprise, and Huawei. The data indicates that Fortinet increased its market share in the past two years, underlining the strength of its product portfolio.
Fortinet's SASE offering also has a strong reputation, though it receives less praise than the network security segment. The company has competitive challenges to overcome in its higher-growth service segments, but the potential rewards are evident. It's an important avenue for future expansion plans.
Reliable demand drivers
That diversified cybersecurity offering means that Fortinet is positioned to capitalize on a powerful trend that will shape the economy moving forward.
The number of malware attacks and data breaches has increased significantly in each of the past two years. This problem is expected to become even more prominent over the next decade, as the volume of sensitive data expands and offers lucrative opportunities for cybercriminals to exploit. Artificial intelligence can be weaponized for these functions, which could accelerate the trend.
The proliferation of cybercrime is almost certain to stimulate demand for cybersecurity solutions. The industry is forecast to grow 10% to 15% per year over the next decade. SASE is expected to grow more than 25% annually. If Fortinet can maintain or expand its competitive position, the company has excellent growth prospects from industrywide catalysts.
Cybersecurity is a dynamic landscape, but Fortinet is one of the favorites to benefit as the sector expands.
Where can Fortinet stock go?
Fortinet has clear cash flow expansion opportunities, but that doesn't necessarily translate to shareholder gains. Investors should consider valuation relative to the company's underlying financial metrics. Fortinet's valuation ratios reveal a discount relative to most of Fortinet's cybersecurity peers. The company's value is low relative to multiple measurements of expected future profits.
FTNT PE Ratio (Forward) data by YCharts
This discount is attributable to the company's relatively modest 7% revenue growth rate, with a slight acceleration expected later this year. Fortinet's product mix isn't likely to deliver the same growth rates expected from software-focused competitors like Palo Alto Networks, Zscaler, and CrowdStrike. Lower growth tends to result in cheaper valuation ratios, and that's the case here.
Fortinet stock probably can't match the upside potential of higher-growth alternatives in the cybersecurity industry. However, the stock will probably be less volatile thanks to its modest growth expectations and valuation. Like any stock, Fortinet's returns are influenced by factors beyond its control, such as recessions or bear markets.
The company's product portfolio, competitive standing, industrywide growth drivers, and reasonable valuation suggest that this stock can outpace the market in the medium term.
