FTNT : Pre-Breakout Buy ? Read To Know.
$Fortinet(FTNT)$ handed in a glowing report of its Q2 2024 earnings on 06 Aug 2024.
Q2 2024 Earnings (details):
Earnings per share (EPS): came in at $0.57 vs analysts’ estimates of $0.41 and a gain of +50% YoY from $0.38 (Q2 2023).
The impressive +50% gains were due to (a) a reduced share count due to buybacks, (b) lower indirect costs, and (c) growing demand for its higher-margin security subscription offerings.
Revenue reported was $1.43 billion vs analysts’ estimates of $1.40 billion and a gain of +10.6% YoY from $1.293 billion (Q2 2023).
Free Cash Flow (FCF): was $318.9 million compared to $438.3 million in Q2 2023.
Net income (GAAP): was $379.8 million vs $266.3 million (Q2 2023); a gain of +42.62% YoY.
Q3 2024 Outlook.
Personally, I thought Fortinet’s Q3 2024 guidance / outlook played a crucial role in its recent ascend.
Revenue range of $1.445 billion to $1.505 billion.
Billings in the range of $1.530 billion to $1.600 billion
Non-GAAP gross margin in the range of 79.0% to 80.0%
Non-GAAP operating margin in the range of 30.5% to 31.5%
Diluted non-GAAP net income per share in the range of $0.56 to $0.58, assuming a non-GAAP effective tax rate of 17%. This assumes a diluted share count of 767 million to 777 million.
Since then, the stock has witnessed a healthy surge of +35%, thanks to impressive growth in its revenue & earnings that have beaten Wall Street's expectations. (see below)
The Cybersecurity specialist has also raised its full-year revenue guidance, making this stock “attractive”.
This also explains the stock’s recent parabolic move — a phenomenon that refers to the rapid increase in the share price of a company within a short time, just like the right side of a parabolic curve.
Another piece of “good news” for investors is that Fortinet stock could continue to head higher thanks to the company's focus on tapping fast-growing niches of the cybersecurity market.
That should allow it to profit from a massive addressable market in the long run.
Fortinet stock might keep going up because the company is focused on growing parts of the cybersecurity market.
This means it can make a lot of money in the future.
Growth Factors.
(1) Services revenue.
An area of growth that was hardly covered by Wall Street analysts was Fortinet’s services revenue stream.
It has increased nearly +20% YoY to $982 million, accounting for 69% of its top line.
It is a continuous improvement from Q2 2023, when service revenue accounted for 63% of its top line.
There is still a lot of room for growth in Fortinet's service revenue, implying continual improvement in company’s margin profile.
(2) Deferred revenue.
Another out of focus area is Fortinet’s deferred revenue.
It (deferred revenue) has increased +15% YoY to $5.9 billion (Q2 2024), outpacing the growth in its top line.
This metric refers to the money that's collected in advanced for services to be rendered in the future.
Once services are delivered, FTNT will be able to recognize the deferred revenue on its income statement as actual revenue.
With improvement in Fortinet's deferred revenue, it also indicates that its revenue from sales of security subscriptions should continue to improve.
Fortinet expects its addressable market:
To land at $5.85 billion in 2024, a +10% YoY jump from 2023.
To jump to $228 billion by 2028; with lots of room to grow.
Below chart projection indicates, Fortinet's growth is expected to pick up going forward.
Fortinet - Revenue projection
To Buy or Not To Buy ?
To answer the question, consider the followings:
Following its recent rally, on 03 Sep 2024 - Fortinet’s P/E ratio (TTM) stood at 45.64.
It is the same as US tech sector's average P/E ratio of almost 46.
Fortinet’s forward P/E ratio is estimated to be 39x, based on projected improvement in its bottom line; that is “good” news.
Forecast for the next five years is bright, with Fortinet expected to clock an annual earnings growth rate of 15%.
Mathematically.
If Fortinet continues to grow at breakneck pace (15% growth rate), its earnings could increase to $4.10 per share in 5 years (using FY 2024's projected earnings of $2.04 per share as the base).
$NASDAQ 100(NDX)$ index has an average forward P/E ratio of 29 (using the index as a proxy for tech stocks).
If Fortinet trades at a similar forward P/E ratio (a significant discount to its current earnings multiple), after 5 years, its stock price could jump to $119 (based on projected earnings of $4.10 per share calculated above).
Above calculations suggest that Fortinet's stock price could increase by +58% from its current level.
My viewpoints : (mine only)
If US market performance at the start of September 2024 is anything to go by, then it is more prudent to sit on the fence and wait patiently for the market to regain its footing.
When a news article is overly optimistic about a listed company, it is only natural to be wary.
Looking at Fortinet’s current PE ratio, a “logical minded” investor will know, now is not the time to scoop up this cybersecurity stock yet.
Projections are a dime a dozen and there are just too many “positive” elements thrown into the equation.
A generous 15% growth for next 5 years borders on “un-sustainable”, given the latest Economic and Jobs reports pointing to a slowing US economy, that if mismanaged will spiral quickly into a recession.
According to US News Money (on 5 Aug 2024), the US Treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. (see above)
Not to mention, the many posts about US economy possible slip into recession. (see above)
Last but not least, a growing national debt does nothing to ease the prospect of a festering US economy.
On 11 Aug 2024, US debt was $35.15 trillion.
By 03 Sep 2024, it has ballooned to $35.28 trillion.
in less than 3 weeks, debt has grown by +$130 billion.
I do not think there will be a recession before US presidential election in November 2024. If there is one, it might happen in early 2025.
Must Read: Click on below titles to access. Give a like & help to repost ok. Thanks.
Do you think Fortinet is worth a second look ?
Do you think the US economy will be able to avoid recession and, in the process, “safeguard” US stock market ?
If you find this post interesting, give it wings! ️ Repost and share the insights ?
Do consider “Follow me” and get firsthand read of my daily new post. Thank you.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
Pls "Re-post" so that more get to know. Tks! Rating is important (to me).
Consider "Follow me" and get first hand read of my Daily new posts? Thanks!). Tks!!