Fortinet appears to be experiencing growing pains, but that may be the wrong way to look at the situation.
shares of fortinet (FTNT 0.09%) It returned to recent gains as investors digested another lackluster outlook from the cybersecurity company's management. Although pandemic lockdowns and resulting organizations upgraded their IT infrastructure led to several years of accelerated growth, Fortinet's historically hardware-based business experienced periodic downturns. I am.
Ultimately, this has led to three years of poor share price performance. Does that mean Fortinet stock is dead? Or is there more to the story?
Strong quarter, but investors are concerned
In fact, Fortinet had a decent first quarter of 2024. Revenues were $1.35 billion, up 7% year-over-year, but close to the upper end of the guidance management provided three months ago. Earnings per share (EPS) based on generally accepted accounting principles (GAAP) increased 26% year over year to $0.39. Adjusted EPS also increased 26% year over year to $0.43, exceeding the high end of adjusted EPS guidance of $0.39.
The company also raised its full-year forecast for 2024. We currently expect sales to be in the range of $5.745 billion to $5.845 billion (previous guidance three months ago was $5.715 billion to $5.815 billion), with a midpoint forecast of $5.715 billion to $5.815 billion. This suggests a growth rate of just over 9% in 2020. Adjusted EPS guidance has also been raised to a range of $1.73 to $1.79 (previously $1.65 to $1.70), suggesting 8% growth at the midpoint.
Free cash flow (FCF) decreased slightly to $609 million from $647 million in the same period last year. Interestingly, there were no share buybacks this quarter. Is Fortinet gearing up for a big move, or is it just a retooling for a new product launch? Either way, outstanding liquidity has increased significantly, with cash and short-term investments now at their highest. 3 billion, offset by just $993 million in long-term debt.
Things are going well so far, but why is the market worried? As we mentioned last quarter (and several quarters before that), Fortinet's charges are worrying investors. Invoice Amount is the invoice amount owed by the customer. For technology companies, especially those like Fortinet that are focused on expanding their software businesses over the next few years, billings can be a key indicator of future growth.
The company maintained its full-year billing forecast for 2024 at $6.4 billion to $6.6 billion. His 2023 bill was $6.4 billion, so Fortinet's long-term trajectory appears to be seriously losing momentum.
Rebuild to meet new cybersecurity needs
As mentioned at the beginning, Fortinet has historically been a hardware-based network security provider. Its expansion is tied to sales of firewall network security devices, and like any hardware sales, growth comes in waves; Fortinet's hardware sales are now in a down cycle after a massive growth cycle during the pandemic. First quarter product sales were $409 million, down 18% from the same period last year.
But recently, Fortinet's recurring services business (driven by an expanding software portfolio) has been growing rapidly. The division's sales increased 24% year over year to $944 million. Most of this software enhancement was entirely in-house service development. palo alto networks' (PANW 0.61%) Large-scale acquisition strategy in recent years.
This unified OS alone won't solve some of the issues that can leave parts of your business unprotected, such as silos of customer data and operations. As organizations adopt “hybrid cloud” strategies, parts of their business remain in traditional IT (on-premises, such as office computers and servers), while other parts are moved to the cloud (either in a private cloud). This trend is becoming more and more common. or public data centers accessed via a network connection or the Internet).
New products like Secure Access Service Edge (SASE) are emerging to solve this problem.Palo Alto Networks is recognized as a leader in SASE and is also a leader in emerging cloud-based companies such as: Z scaler (ZS 1.55%) has built an all-cloud-based alternative called SSE (Secure Services Edge, a subset of the complete SASE solution). However, co-founder and CEO Ken Xie said during the first quarter earnings call that the new service's OS will be the same as the old service, and that there will be flexibility in how customers deploy SASE security services. He explained that Fortinet could have a long-term advantage over its competitors, including in terms of Ability to cover multiple computing endpoints in a single software deployment (which may be in the cloud or on-premises).
Simply put, claims are down for a variety of reasons, all of which are tied to Fortinet building out this new SASE and other cybersecurity services. As a result, although some growth has been sacrificed this year, Xie and his top team still expect expansion to accelerate again in the second half of 2024.
Fortinet may have something great in store
There's no denying that Fortinet is not a “cheap” stock. The stock currently trades at 38 times trailing 12-month GAAP EPS, or 27 times trailing-12-month free cash flow. This premium price is why the stock has been so volatile in recent years.
However, true value is found in future expectations, not past financial metrics. If Fortinet emerges from its current downturn cycle and delivers strong returns from its current investments (such as its new SASE offering) as it has in the past, this could actually be a solid long-term bet.
Data by YCharts.
I already have a full position in the stock, as Fortinet has been a core cybersecurity stock in my portfolio (along with Palo Alto Networks) for many years. Therefore, I will not be purchasing any more at this time. But given its track record to date, I'm happy to own it and wait for growth to resume.
