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From the Small- and Mid-Cap Survey: Fortinet, Inc.
Fortinet, Inc. (FTNT) was incorporated in 2000 and went public in November 2009. The company offers a wide range of network security products and services designed to protect data delivered via the Internet. As of December 31, 2011, Fortinet had delivered over 850,000 appliances to more than 10,000 distributors and over 125,000 end users worldwide, including a majority of the Fortune Global 100 companies. According to International Data Corporation, Fortinet is the market leader in unified threat management (UTM), with 17% of that portion of the broad Internet security market.
Through its products and subscription services, Fortinet provides broad protection against security threats. It also simplifies information technology security efforts for businesses, service providers, and governments. Its FortiGate appliances offer security and networking functions in areas such as firewall, virtual private network (VPN), antivirus, intrusion prevention, Web filtering, and antispam. The basic FortiGate models provide perimeter protection for small businesses and remote offices of bigger firms. The most complex appliances furnish network security to large customers and provide high speed networking, wide area network (WAN) and storage connectivity, and the flexibility to add extra firewall or intrusion prevention features.
Fortinet also offers security services, such as updates for virus signatures, attack definitions, and scanning engines that it sells under the FortiGuard name. Customers buy security services in advance, typically for one-year terms, to obtain updates for software run on FortiGate appliances. The firm also offers technical support services for its software and hardware, training, and consultation for deployment of its products. In the first quarter of 2012, revenues were derived about 54% from services and 46% from appliances.
The company does not manufacture any of its products, relying instead on outside contract manufacturers. While that poses a small risk, Fortinet offsets it by making some forward commitments. But the contract manufacturing industry is so competitive that we do not see its reliance on outside suppliers as a real risk. Similarly, almost all sales are to system creators that put security packages together for the ultimate end users. As the company with thousands of these “middle men’’, risk seems low in this area, as well.
Fortinet’s earnings have risen dramatically since its initial public offering and figure to rise at around 25% a year for at least a few years. Although the overall Internet security market may grow at perhaps 10% a year, the company’s niches, especially UTM, should see higher growth, and it will probably gain market share, as well. The unified offering simplifies the task of Internet security by giving customers just one supplier for most Internet security needs.
Major competitors include Check Point Software (CHKP), Cisco Systems (CSCO – Free Cisco Stock Report), Juniper Networks (JNPR), SourceFire (FIRE), Symantec (SYMC), Verisign (VRSN), and the McAfee division of Intel (INTC – Free Intel Stock Report). While a number of its industry peers are considerably larger than Fortinet, it reports beating out several of them on recent contracts.
Fortinet and its industry should benefit from customers’ need to lift spending on Internet security, to repel more cyber attacks, accommodate higher traffic as companies require or permit more use of mobile devices, and meet more stringent compliance requirements, such as the Payment Card Industry Data Security Standard. It has no debt and $600 million in cash, giving it ample firepower for acquisitions, though almost all of its recent growth has been internal, through a significant increase in its headcount. Thus, while Fortinet looks like a great company, the question is whether it constitutes a good investment at around 48 times this year’s forecasted earnings. On that score, we think FTNT does merit a place in growth portfolios, though even a minor earnings miss could result in a steep selloff.
At the time of this article’s writing, the author had no positions in any of the stocks mentioned.