After a 40% surge in early 2019, shares of cybersecurity firm Fortinet (NASDAQ: FTNT) have lost nearly all of those gains since the company reported on its first quarter. Results exceeded management's guidance, but investor sentiment has soured nonetheless. Something similar has happened with Fortinet's rival, Palo Alto Networks, whose stock has also declined since reporting, as Wall Street mulls over possible effects from a trade war between the U.S. and China and a potential global economic slowdown.
The cybersecurity industry is growing fast, though, and Fortinet's management is optimistic about its prospects. It's time for investors to get over their fears and give this stock some love.
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Fortinet put up solid numbers to kick off the new year. A 19% rise in revenue equated to a 39% increase in adjusted earnings. The big bottom-line jump was due to improving profit margins and operating expenses not rising as fast as the top line. The first-quarter results continued the pace the cyber security company set last year -- revenue was up 20% and adjusted earnings soared 77% in 2018.
Some of the worry that has cropped up surrounding Fortinet was the economic slowdown in China and whether the trade war would put a dent in the business' upward trend. That hasn't happened -- at least not yet. Management said that strong growth continued in both Asia and Europe in Q1. Besides, secular tailwinds are blowing strongly at Fortinet's back. Research firm Global Market Insights thinks that the cybersecurity industry will grow 17% a year through 2024.
Fortinet is investing to capture this growth, and -- trade disputes or not -- its strategy is working. The company continues to pick up new deals, inking 35 new contracts worth over $1 million during the first quarter alone. That trend doesn't look like it will slow down anytime soon.
Not cheap, but cheap enough
During the second quarter, Fortinet's management said revenue should increase 15% to 17%, translating into an adjusted earnings rise of 20% to 24%. Granted, that is a slowdown from the recent past, but the full-year 2019 outlook did get a slight bump to at least 15% revenue growth and at least 14% adjusted earnings growth. Not too shabby, especially as the company continues to transition customers over to newer recurring services. Given the expected 15% growth in billings (money that's been collected but service not yet provided) for the year, there is a lot left in the tank at Fortinet.
Based on adjusted earnings for full-year 2019, the stock currently trades at a multiple of 33. An even better metric, though, is price to free cash flow -- money left over after basic operations and capital expenditures are paid for. Fortinet is currently valued at 19 times trailing-12-month free cash flow. Neither measure makes this cybersecurity business a screaming deal, but for a company growing by double digits, it's a fair price to pay. Plus, with new seven-figure deals getting signed all the time, Fortinet has plenty of tailwinds.
Thus, I say the recent sell-off in the wake of first-quarter results is overdone. Fortinet is one of the best plays in the security industry and puts up consistent quarterly expansion. Ignore the overblown headlines and buy the dip.
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