For Fortinet, More Growth On The Way?

Most stocks have performed badly this year due to the Covid-19 induced demand slump, restrictions on consumer movement, and change in buying behavior. However, there is a subset that has done well either because Covid-19 had minimal impact or because the crisis presented new opportunities. One such stock is Fortinet Inc (NASDAQ: FTNT), which sells cybersecurity products and services. The stock has grown nearly 25% this year, climbing from $110 to $140 as of July 6, 2020. Why? Because Covid-19 barely had any impact on the company’s revenue growth. The company’s first quarter, which ended on 31 Mar 2020, saw a 22% y-o-y sales jump. But is this all? There is more to this story. Even though Fortinet’s stock has increased almost 100% since 2018, it still has plenty of room to grow. Trefis’ price for Fortinet is $190, about 40% above the market price of $140 (as of July 6, 2020). Here is why.

This Is Why Fortinet’s Stock Could Continue To Climb

We take a conservative stance and forecast Fortinet’s 2020 sales at $2.11 billion, which is roughly flat compared to 2019. That’s still a winner compared to industries such as hospitality, leisure, retail, and airlines that are looking at 20%-40% drops in revenue for the full year. What’s more? We expect a sharp rebound in sales in 2021 (up over 25%), which will put the company back on the growth trajectory, albeit shifted by a year, that it has enjoyed since 2017. Fortinet’s revenue has increased nearly 44% between 2017 and 2019.

A majority of companies (70%) are looking to increase their cyber security spending. Covid-19 has brought a fundamental shift in the way businesses operate, and there is an increased demand to protect the cloud environment as employees work and collaborate remotely. That’s great news for Fortinet. We believe this is not just a temporary opportunity to score some client wins, but a longer term shift that could benefit Fortinet for many years. Another interesting trigger is Fortinet’s net margins. After years of remaining subdued, the company has been able to boost its net margin to more than 15% in 2019. This is higher than that for one of its key competitors, Palo Alto Networks, whose stock has managed to stay flat this year.

So What Does This Mean For Share Price?

The combination of the above will imply 2020 EPS of $2.51 per share. How much should the market pay for each dollar of Fortinet’s earnings? There are two things to consider – risk and reward. Let’s look at the risk first. Fortinet, even though it is sailing even in the crisis, like all stocks, has risks that must be considered. There is competitive threat from the likes of Pala Alto Networks, Check Point Software, and even giants like Cisco and Juniper. In addition, many industries facing a cash crunch may direct their remaining liquidity to core operations instead of spending on IT infrastructure upgrades, which could slow down market growth for Fortinet. However, to counter balance this risk, there is enough growth opportunity. As we discussed above, the structural shift can benefit Fortinet’s revenue and margin. Thus, we apply a P/E of 75 for Fortinet, which is high but close to its recent peak. In fact, the company’s P/E has increased sharply from 35.9 in 2018 to 55.9 in 2019, and is now past 65 suggesting that investors are placing a strong bet on Fortinet’s future growth. We believe this bet is justified.

With the expected EPS of 2.51 and P/E multiple of 75, we peg Fortinet’s price at $190, implying significant upside to current market price. While it may seem pricey from a P/E stand point, there is return in store as EPS could jump as much as 30%-40% in 2021 as growth rebounds. We priced in this growth expectation.

Are there any other stocks out there that can unlock value? The answer is yes! For instance, take a look at Zebra Technologies which has grown 150% but still has upside potential.

Beyond this, have a look at our portfolio of low risk high fliers too. Check out these 5 S&P 500 stocks that could be outperformers.

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