Fortinet , Inc. (NASDAQ:FTNT), a leading provider of comprehensive cybersecurity solutions, continues to navigate a dynamic market environment as it approaches the end of fiscal year 2024. The company has demonstrated resilience in the face of challenges in its traditional hardware segment while capitalizing on robust growth opportunities in cloud security and Secure Access Service Edge (SASE) offerings.
Recent Financial Performance
As Fortinet prepares to report its third-quarter results for 2024, analysts anticipate strong performance, with billings expected to reach the high end of the company's guidance range. This optimism is fueled by potential market share gains from competitors like Cisco (NASDAQ:CSCO) and normalizing trends in the hardware segment. The company's services billings are projected to be somewhat below seasonal norms when excluding contributions from recent acquisitions, leaving room for potential upside.
Looking ahead to the full fiscal year 2024, Fortinet is expected to maintain its current guidance range for billings between $6.4 billion and $6.6 billion. This outlook incorporates the anticipated strong third-quarter performance and accounts for higher-than-normal implied seasonality in the fourth quarter. The projected exit rate for billings growth in the fourth quarter of 2024 is estimated at approximately 12%, aligning with analysts' expectations for fiscal year 2025.
Product and Service Segments
Fortinet's product portfolio continues to evolve, with the company navigating a transition in its firewall and hardware businesses. After facing headwinds in this segment throughout much of 2023 and early 2024, there are signs of stabilization and potential recovery. Partners have reported improved sell-through rates and a rebound in growth compared to the first half of the year.
While the traditional hardware segment works towards full normalization, Fortinet is experiencing significant momentum in its SASE and cloud security offerings. SASE solutions accounted for approximately 23% of total billings in recent quarters, with partners indicating that increased enablement efforts are driving higher engagement and sales. Analysts expect SASE and cloud security to become increasingly material contributors to Fortinet's overall revenue mix in the coming years.
Competitive Landscape
Fortinet operates in a highly competitive cybersecurity market, facing pressure from established players like Cisco and Palo Alto Networks (NASDAQ:PANW), as well as emerging challengers. While the company has demonstrated the ability to gain market share in certain segments, some analysts have noted potential share losses to competitors, particularly in the European market.
Despite these competitive pressures, Fortinet's integrated approach to security and networking, exemplified by its Universal SASE platform and the integration of FortiOS across various product lines, is seen as a key differentiator. The company's large installed base of over 700,000 customers provides a solid foundation for upselling and cross-selling newer solutions like SASE and cloud security.
Acquisitions and Strategic Moves
Fortinet has been actively expanding its capabilities through strategic acquisitions. The company recently acquired Next (LON:NXT) DLP to enhance its data protection offerings within the Universal SASE platform. Additionally, the acquisition of Lacework is expected to bolster Fortinet's cloud security and Cloud Native Application Protection Platform (CNAPP) capabilities with AI-powered technology.
These acquisitions, while potentially dilutive to margins in the short term, are viewed positively by analysts for their potential to expand Fortinet's total addressable market and strengthen its competitive position in high-growth segments of the cybersecurity industry.
Margin and Profitability Analysis
Fortinet has demonstrated strong profitability metrics, with operating margins reaching record levels of 35.1% in recent quarters, representing an 800 basis point increase year-over-year. This improvement is largely attributed to a shift towards higher-margin software licenses and services revenue.
However, the impact of recent acquisitions is expected to put pressure on margins in the latter half of 2024 and potentially into 2025. Analysts project that operating margins may remain flat or experience a slight decline, settling around 30% in fiscal year 2025 due to M&A-related dilution.
Bear Case
How will continued challenges in the hardware segment impact overall growth?
While there are signs of stabilization in Fortinet's hardware and firewall business, the segment continues to face headwinds. The company does not anticipate a full refresh cycle until calendar year 2025, which could limit growth potential in the near term. If the recovery in this segment is slower than expected or if market demand for traditional firewall products continues to soften, it could weigh on Fortinet's overall growth trajectory.
Could M&A integration issues and margin dilution hurt profitability?
Fortinet's recent acquisitions, while strategically important, introduce risks related to integration and potential margin dilution. The company has already indicated that these deals will impact margins in the short term. If the integration process proves more challenging or costly than anticipated, or if the expected synergies fail to materialize quickly, it could put additional pressure on Fortinet's profitability metrics, potentially disappointing investors who have come to expect the company's strong margin profile.
Bull Case
How much growth potential remains in SASE and cloud security?
Fortinet's SASE and cloud security offerings have shown impressive growth, with SASE billings reportedly growing at triple-digit rates. As enterprises continue to adopt cloud-based and hybrid work environments, the demand for these solutions is expected to remain robust. Fortinet's strong customer base and integrated platform approach position it well to capitalize on this trend. If the company can maintain its current growth rates in these segments and successfully cross-sell to its existing customer base, it could drive significant revenue expansion in the coming years.
Can Fortinet maintain its strong competitive position against rivals?
Despite facing intense competition, Fortinet has demonstrated the ability to gain market share and maintain strong customer relationships. The company's integrated approach, combining networking and security capabilities, resonates with many enterprises seeking to simplify their IT infrastructure. If Fortinet can continue to innovate and effectively integrate its recent acquisitions, it may be able to further differentiate its offerings and solidify its position as a leader in the cybersecurity market. Success in this area could lead to sustained growth and potentially expand the company's valuation multiples.
SWOT Analysis
Strengths:
- Strong growth in SASE and cloud security segments
- High operating margins and profitability
- Large installed customer base for upselling opportunities
- Integrated platform approach (Universal SASE, FortiOS)
Weaknesses:
- Ongoing challenges in hardware/firewall segment
- Potential margin pressure from recent acquisitions
- Competitive pressures in certain markets (e.g., Europe)
Opportunities:
- Expanding total addressable market through acquisitions
- Growing demand for integrated security and networking solutions
- Potential for increased market share gains from competitors
Threats:
- Intense competition from established and emerging players
- Rapid technological changes in the cybersecurity landscape
- Potential economic slowdown impacting IT spending
Analysts Targets
- Barclays (LON:BARC): $85 (November 4th, 2024)
- Cantor Fitzgerald: $88 (October 29th, 2024)
- RBC Capital Markets: $72 (August 7th, 2024)
- Cantor Fitzgerald: $65 (August 7th, 2024)
As Fortinet approaches its analyst day in November 2024, investors and analysts will be keenly watching for updates on the company's medium-term financial model and its strategy for balancing growth with profitability in an evolving cybersecurity landscape. The company's ability to execute on its SASE and cloud security initiatives while managing the transition in its hardware business will be critical factors in determining its future success.
This analysis is based on information available as of November 5, 2024, and reflects the views and projections of various analysts covering Fortinet, Inc.
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