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>>> Should You Buy Fortinet After Its Recent Stock Split?


Motley Fool

By Bradley Guichard

Aug 11, 2022


https://www.fool.com/investing/2022/08/11/should-you-buy-fortinet-after-its-recent-stock-spl/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article


KEY POINTS

Cybersecurity leader Fortinet executed a 5-to-1 stock split less than two months ago.

Last week's Q2 earnings release sent shares tumbling.

Is this an opportune time to pounce on the stock?

Fortinet is a leader in defending against growing cybersecurity threats.


Cybersecurity is one of the defining defense issues of our time. What is unique is that it is largely fought by the private sector. Businesses large and small spend billions each year to defend against breaches, ransomware, and other bad actors. An ounce of prevention is definitely worth a pound of cure.

What's more, it seems it is just a matter of time before a broad cyber conflict takes place. This would be a gigantic catalyst for cybersecurity companies like Fortinet (FTNT) which is at the forefront of network security.

Fortinet's stock split didn't garner nearly the attention of Amazon or Alphabet, but perhaps it should. The stock has outpaced both of these juggernauts over the past one, three, five, and 10-year periods.

Is the market being shortsighted?

Fortinet sells products and services such as its Fortigate Next-Generation Firewall, security subscriptions, and tech support services. Higher-margin services make up over 60% of total sales. The market reacted negatively to Fortinet's second-quarter earnings, but this may be shortsighted.

The tremendous growth in sales and billings has become a hallmark of Fortinet. The company expects to continue this trend this year with sales and billings north of $4.3 billion and $5.5 billion, respectively, as shown below.

Billings growing in excess of sales suggest strong continued growth. These numbers represent revenue that will be earned in future periods.

Cash flow is still king

The cybersecurity industry is full of fast-growing companies that aren't profitable. Fortinet has a solid mix of both. Fortinet had an operating margin of 19% last quarter, far outpacing many competitors. This success allows Fortinet to generate generous free cash flow, which it uses to improve the company and repurchase its stock. Fortinet spent $800 million on buybacks in Q2, rewarding shareholders and offsetting the effect of stock-based compensation. In fact, Fortinet's free-cash-flow margin puts it in the top 10% of the S&P 500.

Room to expand and catalysts

Statista puts global cybersecurity revenue at $160 billion for 2022, ballooning to nearly $300 billion in the next five years. Fortinet has set itself up to capture a significant chunk of this market.

A cybersecurity sector catalyst is also upcoming; we just don't know when. Early examples include the Colonial Pipeline attack and Russian tactics in Ukraine. Just last week, during House Speaker Nancy Pelosi's visit, broad cyberattacks were reported in Taiwan.

Businesses and governments must be ready to meet this challenge and will spend billions doing so. Fortinet has the opportunity to continue outpacing the market for years to come.

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