This Remarkably Enhanced Stock has Surged by 70% since August, but Can Its Spectacular Advancement Endure?
This Remarkably Enhanced Stock has Surged by 70% since August, but Can Its Spectacular Advancement Endure?
Fortinet's (FTNT -0.55%) share price has seen a remarkable surge since August 2024, climbing approximately 70% during this period. This upward trend has followed a series of impressive quarterly results, boosting the cybersecurity company's stock market performance.
The impressive third-quarter results, announced in early August 2024, acted as a catalyst, causing the stock's price to skyrocket. These results were further enhanced by Fortinet's optimistic forecast, which pleased investors due to the company's improving margin profile and growing revenue pipeline.
This positive momentum continued when Fortinet announced its third-quarter results on November 7, 2024, leading to a nearly 10% increase in the company's share price the following day. Let's delve into why the stock saw such a surge and evaluate if this cyberspace giant can maintain its incredible bull run.
Fortinet's earnings growth is exceptional
Fortinet reported Q3 revenue of $1.51 billion, an 13% year-on-year increase, slightly surpassing analysts' expectations of $1.48 billion. The company also posted outstanding bottom-line growth, with its non-GAAP earnings rising nearly 54% year-on-year to $0.63 per share. This figure outperformed Fortinet's guidance of $0.51 per share in earnings.
The impressive growth in Fortinet's earnings can primarily be attributed to a substantial improvement in the company's margins during the quarter. Specifically, Fortinet's non-GAAP operating margin increased from 27.8% in the previous year-ago period to 36.1% in the latest quarter. This remarkable expansion in Fortinet's margins is linked to the company's increase in services revenue, which features a higher margin than its product revenue.
Fortinet's services segment carries a gross margin of 88.5%, compared to a somewhat lower 68.4% for the product segment. Given that Fortinet's services revenue increased 19% year-on-year in Q3 to $1.03 billion, whereas its product revenue rose by only 1.7% to $474 million, it is not difficult to understand why the overall margin improved so significantly.
The services segment now accounts for 68% of the company's total revenue, increasing from 65% in the same period the previous year. Notably, this business is thriving due to the adoption of Fortinet's rapidly growing offerings that cater to the security operations (SecOps) and unified secure access service edge (SASE) sectors.
SecOps refers to the cooperation between an organization's security and operations teams as they strengthen their cyber defenses and resolve incidents more efficiently. Fortinet is aiming to capitalize on this market opportunity by integrating artificial intelligence (AI) tools into its SecOps offerings. In fact, during its latest earnings conference call, Fortinet management highlighted that AI-focused SecOps was its fastest-growing product, showing a 32% billings growth rate and accounting for 10.5% of the company's overall billings.
Fortinet estimates that the market for AI-driven SecOps offerings could reach $163 billion by 2028, with an annual growth rate of 13%. Additionally, the market for unified SASE offerings is also forecast to expand at an annual pace of 16% through 2028, generating an estimated $46 billion in annual revenue. Given that this product allows companies to integrate their networking and security offerings into a single platform, it enables organizations to secure both remote and on-premise devices, as well as cloud-based data and applications.
Fortinet witnessed a 14% increase in unified SASE bookings in the last quarter, while revenue from this segment increased by 27%. The strong performance in the SecOps and unified SASE segments resulted in a 15% year-on-year increase in the company's remaining performance obligations (RPO) to $6.1 billion. This metric refers to the value of the company's unfulfilled contracts, indicating that the growth in the RPO suggests that Fortinet's future revenue pipeline is improving.
This analysis explains why the company boosted its full-year forecast. Fortinet now anticipates revenue of $5.89 billion at the midpoint of its guidance range, up from the prior estimate of $5.85 billion. The company also expects non-GAAP earnings for the full year to be $2.24 per share, compared to $2.02 per share in 2024. This would represent a 37% increase over 2023's earnings of $1.63 per share.
But can the stock keep climbing higher?
It's undeniable that Fortinet has been recording some impressive earnings growth recently, but the stock has experienced a considerable surge in a short period of time. As a result, Fortinet is now trading at approximately 49 times its trailing earnings, which is a premium to the tech-focused Nasdaq-100 index's earnings multiple of 33. As the following chart demonstrates, investors could have acquired this cybersecurity stock at a more reasonable earnings multiple earlier in the year.
Consensus estimates predict a 20% annual increase in Fortinet's earnings over the next five years. Based on its projected earnings for 2024, the company's bottom line could reach $5.57 after five years. Assuming the company succeeds in meeting this target and trades at a multiple of 30 times earnings at that time (in line with the Nasdaq-100 index's forward earnings multiple), its stock price could increase to $167. This would represent a 72% increase from its current price.
Investors searching for a potential booming investment may want to think about incorporating Fortinet into their holdings, as it appears to have additional growth potential in the future, even following its recent noteworthy advancements.
The impressive earnings growth and optimistic forecast by Fortinet have attracted numerous investors, leading to a surge in interest in investing in the company's stock. In light of the company's strong financial performance and promising outlook, Fortinet's stock has become an appealing option for finance-focused individuals seeking potential booming investments.